Planning Commission Deputy Chairman Montek Singh Ahluwalia on Monday said duty cuts on petroleum products will have a “negative impact” on fiscal deficit, but ruled out any protracted effect on inflation due to the “inevitable” price hike .
“Certainly, the duty cuts will have a negative impact on fiscal deficit,” Mr. Ahluwalia said, adding, in a rising global oil price scenario increasing the retail price was inevitable.
The Budget had pegged fiscal deficit for this fiscal at 4.6 per cent, against budget estimate of 5.1 per cent for FY’11.
Keeping the oil prices low in an artificial manner would have weakened the economy and the oil sector, Mr. Ahluwalia said, adding the hikes will have a temporary effect on inflation as it will wear off in three-four months.
If the government had prolonged the fuel price hike announcement, it could have had an impact on fiscal deficit, which in turn would have impacted inflation, he explained.
Inflation, Mr. Ahluwalia said, is a global problem and “it is going to take longer than we originally thought” to tame.
Core inflation stood at an uncomfortable 9.06 per cent in May.
The government last Friday increased diesel price by Rs. 3 a litre, cooking gas by Rs. 50 a cylinder and kerosene by Rs. 2 per litre. It has also reduced customs and excise duties on petroleum products.
While the government abolished the 5 per cent customs or import duty on crude and slashed the same on diesel and petrol to 2.5 per cent from 7.5 per cent, it also reduced excise duty on oil products from 7.5 to 2.5 per cent.
The reduction in excise duty on diesel would lead to a revenue loss of Rs. 23,000 crore this fiscal.
The price hikes would help oil companies limit their revenue loss by Rs. 21,000 crore, but still would end the fiscal with about Rs. 1,20,000 crore of revenue loss.