Fuel excise cut will widen fiscal deficit, Moody’s says

COIMBATORE: COIMBATORE: The cut in excise duty on petroleum products will widen fiscal deficit, a credit negative, Moody’s Investors Service has said.
The Government of India (Baa2 stable) effected a reduction in the central excise duty on petrol and diesel of Rs 1.5 per litre and asked public sector oil marketing companies to absorb an additional Re 1 per litre reduction in petrol and diesel prices on October 5.
“Overall, excise duty cuts are credit negative because they will reduce government revenue collection and increase India's fiscal deficit,” the agency said.
“The excise cuts will reduce government revenue by Rs 10,500 crore (about $1.4 billion) or 0.05% of GDP (gross domestic product) for the remainder of fiscal 2018, which ends in March 2019,” it said.
“These measures create material downside risks to the central government’s fiscal deficit target of 3.3% of GDP for fiscal 2018. Because the government had already met 94.7% of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure,” Moody’s stated.
“Consequently, we expect the central government deficit target to slip modestly to 3.4% of GDP, while the combined general government deficit (central and state) should remain at about 6.3% of GDP,” it said.
The government’s revenues from excise duties on petroleum products have more than doubled since fiscal 2014. Unlike the central government, state governments charge VAT (value added tax) on fuel (which is outside of the central Goods and Services Tax net) as a percentage of prices and have therefore benefited from rising oil prices.
“We expect the stimulus of fuel excise cuts to have a limited effect on GDP growth. Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits,” Moody’s said.
“We continue to expect real GDP growth of about 7.3% in fiscal 2018 and 7.5% in fiscal 2019. However, intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions present downside risks to our forecasts,” the agency said.