Fuel tax cuts won’t go far enough to curb inflation

The central government’s recent decision to cut excise duties on petrol and diesel and realign subsidies on LPG cylinders was long overdue. It cut the duties on petrol and diesel by Rs 8 and Rs 6 per litre, respectively, forgoing over Rs 1 lakh crore in revenue. It has also reduced the customs duty on raw materials and intermediaries for plastic products and iron and steel. Duties on some other items like crude palm and soya bean oil had already been lowered. The decisions have been taken as a package intended to cool down inflation, which has been on an upward trend in recent months. According to the latest data, retail inflation had risen to an eight-year high of 7.9% in April. Wholesale inflation has been in double digits for 13 consecutive months, touching a multi-decade high of 15.1% last month. The government’s actions have come on top of the RBI’s decision earlier this month to raise interest rates.

It is expected that the cut in fuel taxes would help reduce inflation directly by around 20 basis points in June. But on the whole, the actions are unlikely to have a major impact on inflation as the pressure on prices is spread wide across commodities and services. Apart from domestic reasons like the fiscal measures to stimulate economic recovery, the Russia-Ukraine war and global supply disruptions have all contributed to the rise in prices. The global situation is unlikely to turn favourable in the near future. Internally, the RBI is bound to raise rates aggressively in the next few meetings. There is a view that after factoring in the steps taken till now, the consumer price inflation for the current fiscal year may remain elevated at 7.2%, well above the RBI’s tolerance band. The RBI’s forecast on inflation and its timeline to tame it will be keenly awaited now.

The Centre has said that it has acted proactively to slash the excise duty and put the onus on states to reduce VAT on fuel to bring the prices further down. Some states have lowered VAT but others like Tamil Nadu and West Bengal have said that it is unreasonable to expect the states to bring down their taxes and bear heavy loss of revenue. Some others have demanded that the Centre scrap the cess on fuel and bring the prices further down to 2014 levels. The demands and the exchanges have political overtones. States have much less room for financial manoeuvring as their revenue sources are limited, while the Centre can raise resources in many ways. While the states should do the best they can, a political war on the issue is unhelpful.