The Union Government has room to cut the Cess levies on Petrol and Diesel by ₹4.5 per litre without losing revenues, to ease inflationary pressures, rating agency ICRA said on Friday.
Stressing that consumer sentiment had been singed by the second COVID-19 wave in the country, ICRA said that the record retail fuel prices are ‘weighing upon disposable incomes and consumption' and feeding into inflationary pressures. Retail inflation had crossed the central bank’s comfort zone at 6.3% in May.
The revenue loss entailed by the rate cuts would be offset by the rise in fuel consumption expected over 2021-22 making this a revenue-neutral measure, the agency’s chief economist Aditi Nayar pointed out.
“Benefitting from the anticipated rise in mobility and economic recovery aided by an acceleration of vaccine coverage, ICRA has forecast the YoY growth in the consumption of petrol and HSD (high-speed diesel) at ~14% and ~10%, respectively. Our forecasts suggest that consumption this year will be 6.7% higher for petrol and 3.3% lower for HSD,” she said.
Aggregate revenue from fuel taxes is expected to rise by around 13% to ₹3.6 lakh crore this year, with additional revenue of ₹40,000 crore. Foregoing the ₹40,000 crore can support a reduction of ₹4.5 per litre, ICRA estimated in a note.
“Such a cut in the cess rates would offer some relief to household budgets and ease the inflationary pressures related to the rising global crude oil prices,” Ms. Nayar emphasised, stressing that this will also give the central bank more room to focus on growth imperatives rather than fret about high inflation.
In the three monetary policy reviews since February, the Monetary Policy Committee, chaired by Reserve Bank of India governor Shaktikanta Das, has reiterated concerns about inflationary pressures created by the higher cesses and VAT rates announced by the Centre and the State governments on fuel last year, and the need to unwind the same to ease cost push pressures.
While global crude oil prices are on an upswing since this January, riding on hopes of a rebound in the global economy, India’s record fuel prices are also driven by a weaker Rupee and the higher cesses imposed by the central government since March 2020, as well as the increase in Value Added Tax rates by more than three-fourths of the State governments in 2020, ICRA said.
