FICCI Calls for Immediate Excise Duty Cut to Deal with Oil Price Rise

At a time when the Indian economy is on a recovery path, rising oil prices are again posing a high risk to India’s economic growth trajectory. The impact has already begun to be felt, with diesel and petrol prices soaring to new highs since 2014. This will have repercussions on the whole economy, with inflationary pressures on not only fuel but also other goods and services.

“Over the last few years, falling oil prices contributed significantly towards improving the health of the economy. With global oil prices once again spiralling upwards, the macro-economic risks of higher inflation, higher trade deficit and pressure on balance of payments with attended consequences for the Rupee value have once again surfaced,” said Mr. Rashesh Shah, President, FICCI.

“Unless swift action is taken to address the situation, the economic growth will again head towards a speed-breaker. Amongst the most immediate actions that can be taken by the government is to bring down the excise duty on fuel,” said Mr. Shah.

Impact on GDP, current account deficit and inflation

According to the Economic Survey 2017-18, presented earlier this year, for every $10 per barrel rise in crude prices, GDP growth will reduce by 0.2-0.3%, while the current account deficit will increase by 0.4% of GDP and WPI inflation climb up by 1.7% points. When global oil prices went down, the government had hiked excise duty on fuel nine times between November 2014 and January 2016, but reduced it only once in October last year.

“Given that overall excise duties have been raised by as much as Rs. 11.77 per litre for petrol and Rs. 13.47 per litre for diesel, while reduction has been mere Rs. 2 per litre, there is a scope of bringing down the excise duties. While such a move will have an implication on the fiscal revenues at this juncture there is a need to do the fine balancing act,” added Mr. Shah.

“As per some estimates, every Rs. 1/ litre cut in excise duties results in potential revenue losses of Rs. 130-bn (0.1% of GDP). On the positive side, GST collections are edging up and if the government focuses on increasing disinvestment proceeds, revenue losses from excise can be mitigated. Going forward, the government should also work with the States to bring petrol products under the GST regime,” he said.

Over the long term, the solution is more structural and there is a need for a strategic policy towards reducing India’s reliance on oil, entering into strategic partnerships with global oil suppliers and evaluate forming a global consumer alliance along with other leading consumers of oil like China. “Weakening Rupee will further add pressure on the import bill. There is also a risk that monetary policy may turn hawkish, which would in turn have a bearing on growth of private investments,” Mr. Shah added.

Rashesh Shah