Centre cuts excise duty on petrol by Rs 5, diesel by Rs 10 in Diwali reprieve

The Centre announced cuts in excise duty on petrol and diesel by Rs 5 and Rs 10, respectively, giving a Diwali-eve reprieve to consumers across the country from all-time high fuel prices they’ve been paying in the past few months. The reductions take effect Thursday. “Prices of petrol and diesel will thus come down accordingly,” the finance ministry said in a statement. Since May 2020, prices of petrol and diesel have risen by Rs 38.85 and Rs 29.35 per litre, respectively. On Wednesday, petrol was being sold at Rs 110.04 per litre in Delhi and Rs 115.85 per litre in Mumbai. Diesel sold for Rs 98.42 in Delhi and Rs 106.62 in Mumbai.

The late-evening announcement followed a review chaired by Prime Minister Narendra Modi. Sources told ET a presentation was made to the prime minister on the revenue situation. “The reduction in excise duty on petrol and diesel will also boost consumption and keep inflation low, thus helping the poor and middle classes. The decision is expected to further spur the overall economic cycle,” the ministry said.

“States are also urged to commensurately reduce VAT (value-added tax) on petrol and diesel to give relief to consumers… the decision is expected to further spur the overall economic cycle.” Following the finance ministry’s announcement, Assam, Tripura and Goa announced a reduction in VAT by Rs 7 on both petrol and diesel. Rising Prices Feeding into Inflation The Centre’s move follows calls for a cut in fuel taxes in view of rising prices feeding into inflation and the wider impact on growth. Government revenues have jumped on the back of a recovery. Economists expect them to exceed the budgeted estimate by about Rs 2 lakh crore.

As per the latest estimates, tax revenues touched about 60% of the budget estimate of Rs 15.45 lakh crore in the April-September period. The latest move is likely to cost the exchequer about Rs 55,000 crore for the remaining five months of FY22, a government source said. Before the reduction, a consumer in Delhi paid Rs 58.21 in taxes on a litre of petrol, including excise of Rs 32.90 and state VAT of Rs 25.31. Diesel users paid a tax of Rs 46.17 per litre, including Rs 31.8 of excise. The central government had raised duties on petrol and diesel by Rs 13-16 per litre in March-May last year after crude oil prices collapsed in the international market.

But after oil prices started recovering in the international market, domestic fuel rates climbed to record highs. Oil prices have rallied by a quarter in the last two months to $83 a barrel as demand has returned at a faster-than-expected pace while supply has been slow to respond. OPEC+, a group of nearly two dozen oil-producing countries led by Saudi Arabia and Russia, has kept supplies artificially curbed, boosting prices.

Various agencies and experts have flagged issues including coal shortages besides high fuel prices leading to inflationary pressures and rising costs for consumers. “The welcome and much-awaited excise cut will boost sentiment during the festive season, aiding consumption. Moreover, this will ease the inflation pressures arising out of the impact of global supply pressures, helping to avert early policy normalisation,” said Aditi Nayar, chief economist at rating agency ICRA. She added that improved mobility will partly offset the impact of the excise duty cut on the government’s tax collections.

“Based on the available data on total tax collections in H1 FY22, we had expected the gross tax collections to exceed the FY22 BE by Rs 2 lakh crore, which will mitigate the impact of the excise cut,” she noted. Experts cheered the move, saying it will have a broad positive impact. “This reduction will not only reduce the fuel prices directly for the consumers but also assist in reduction of costs through the supply chain, eg, inputs, logistics cost, etc, as the excise duty is a non-creditable cost for businesses too, being outside of GST,” said Mahesh Jaising, partner at Deloitte India. The Indian Foundation of Transport Research and Training said that the Rs 10 per litre cut in excise on diesel should lower truck rentals by at least 10-12 % in the next few days.

The Rs 7.55 per litre hike in diesel price in October had resulted in a jump in freight rates for full truck loads by 12% on most trunk routes. The finance ministry stated that lower diesel prices will come as a boost to farmers during the upcoming rabi season. “The Indian farmers have, through their hard work, kept the economic growth momentum going even during the lockdown phase,” the ministry said.

“The government has made efforts to ensure that there is no energy shortage in the country and that commodities such as petrol and diesel are available adequately to meet our requirements.” However, the government said that the Indian economy has witnessed a remarkable turnaround since the Covid-led slowdown. “All sectors of the economy – be it manufacturing, services or agriculture – are experiencing significant upward economic activity,” it said.