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Insights into Editorial: Why govt has raised excise duty cap on fuel amid coronavirus scare

Financial_Bill

 

Context:

The government increased the caps on special additional excise duty by Rs 8 per litre on both petrol and diesel, taking the cap to Rs 18 per litre on petrol and Rs 12 per litre on diesel.

The decision took place in the amendment to the Finance Bill, 2020, which passed in Lok Sabha. Finance Minister today presented the amendment, which passed without the debate.

However, experts say that the move to give headroom to the government to shore up its falling revenues may still not be enough to compensate for the fall in demand due to the COVID-19 outbreak.

The government doesn’t have too many levers as on the one side healthcare costs could be rising and on the other side your overall revenues may fall because of the slowdown.

Excise duty on petro products contribution:

Historical trend in Brent crude oil prices and its relationship with excise duty collection and retail prices, suggests post-GST, excise duty on petro products now contributes 85-90 per cent of overall excise duty collection of Centre.

In 2019-20 (April-December), total excise collection on petro products for nine months is close to ₹1.5 lakh crore.

The SBI Ecowrap report said that if the same run rate (on excise collection) continues for FY20, then there could be shortfall of at least ₹14,000 crore to the exchequer making case for further increase in the duty.

Pressure on Fiscal deficit as a percentage of GDP:

  1. The SBI Ecowrap report has also highlighted the tough situation government faces in terms of managing fiscal deficit amidst rising demand for fresh expenditure to tackle the novel coronavirus spread.
  2. It said that based on current tax revenue trends, additional expenditure rationalization of ₹1.2 lakh crores might be required in the current fiscal, if India has to stick to mandated 3.8 per cent fiscal deficit.
  3. Even COVID-19 will have an impact on GDP through Trade, Hotels, Transport, Communication & Services sub-segment and this will have pressures on fiscal deficit as a percentage of GDP.
  4. In FY21, nominal GDP growth is at 10 per cent and every 10 bps slippage in nominal GDP numbers in FY21 will push up fiscal deficit by roughly one basis point.
  5. We are already estimating that the impact of a 5 per cent inoperability shock could be 90 basis point on GDP from Trade, Hotel and Transport and Transport, Storage and Communication segment, that could be spread over FY20 and FY21, with a larger impact in FY21.
  6. The report, however, said it will be completely foolhardy to stick to any mandated fiscal rules in times of current crisis that is now threatening to rip apart the entire global financial ecosystem.

Precarious fiscal situation:

Government is increasing duties on petrol and diesel to raise revenues in view of a tight fiscal situation.

Slump in global crude oil prices, alongside possibility of a global economic recession, has forced the government to look for avenues to raise revenues to support growth.

With major companies going for production shut downs, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.

Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand in a meeting of petroleum exporting countries.

What about stuff like milk, sugar and edible oils?

  1. These, again, are produce not brought to be sold in mandis. Dairies procure milk directly from farmers or through bulk vendors. The sugar that mills produce similarly comes from cane sourced straight from growers.
  2. Two-thirds of the edible oil consumed by India is imported. There, too, the problem of the crop having to first come to an APMC (agricultural produce market committee) mandi does not arise.
  3. In the current lockdown situation, there are actually mitigating factors on the supply requirement front, particularly for the three food items.
  4. The most important of them is the demand destruction due to shutting down of HORECA (hotels, restaurants and catering) businesses.
  5. With hardly any business-to-business (B2B) sales happening, the demand for milk products, sugar and edible oil is now only in the business-to-consumer segment.
  6. The Prime Minister mentioned that all necessary steps would be taken to ensure “no shortage of essential items like milk”.

Conclusion:

At present, the total central excise duty on petrol stands at Rs 22.98 per litre and on diesel, at Rs 18.83 per litre.

With Rs 8 per litre increase, these would increase substantially to Rs 30.98 per litre on petrol and Rs 26.83 on diesel. In addition, states also levy VAT on the two products. Petrol and diesel have not been so far included under GST.

The increased excise revenue from oil should not be used for bridging the fiscal gap and pleasing the markets.

Rather sound economics demands it must be used as a fiscal package for income support to the people working in the unorganised sector who are already facing the brunt of loss of jobs.