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4 real reasons why excise duty on fuels can’t be cut

·4 min read

The Bharatiya Janata Party government which is facing demand for a cut in excise duties on fuel has blamed the UPA government for its inability to provide relief. Fuel prices in India have gone through the roof with petrol crossing Rs 100/litre and diesel Rs 90/litre. The respite in global crude oil prices has halted the daily increase in fuel prices in the last few days.

The Finance Minister Nirmala Seetharaman said during a ministry briefing, “They (UPA) took credit for keeping the prices of fuels low. But today the government is paying through the nose for the trickery the UPA indulged in. I can’t provide any relief due to the oil bonds worth Rs 1.44 lakh crore issued by 2012 by the UPA.” The total interest payment outgo during these years has been Rs 70,195 crore,” she added.

The Congress party is arguing that the excise duty collections on fuels has gone up from Rs 99,000 crore in 2014-15 to Rs 3.71 lakh crore in 2020-21 which is a huge sum and the BJP is unnecessarily blaming the previous UPA regime.

So, what is the real reason for the government's inability to reduce excise duty on fuels.

1. Economic crisis precipitated by the pandemic

The pandemic, the resultant lockdowns, the loss of lives and livelihoods has pushed the Indian economy back by two years. In the financial year (FY) 2020-21, India’s GDP contracted by 7.3%. The first quarter of FY 2021-22 was impacted by the second wave of COVID-19 restricting India’s projected GDP growth for the year to 9.5% level.

This means that in absolute terms, we will barely reach the GDP figure of FY 2019-20 this year. The loss of two years of output has put a strain on the country's finances.

With private consumption hit due to lower incomes, and private investment yet to take off due to low demand / capacity utilisation it's up to the center to do the heavy lifting and fuel growth.

2. Funds required for social welfare projects

The pandemic has pushed 230 million people into poverty as per a Azim Premji Institute research paper. These people are dependent upon the centre for their rehabilitation. Many migrants lost their jobs and headed home last year resulting in high unemployment.

Daily wagers lost incomes and had to be provided food. The government has to increase the social welfare budget to provide relief to the people impacted.

Four noteworthy steps were taken by the government which need massive funds of more than Rs 3 lakh crore:

  1. NREGA allocation was increased by Rs 40,000 crore.

  2. Free ration is being provided to 80 crore individuals for 16 months during last year and this year.

  3. Rs 500 per month for 3 months was deposited in Jan Dhan accounts of more than 20 crore female account holders.

  4. The government is also providing free vaccination to the population.

The budget for these programs will be disturbed if there is any excise duty cut thus impacting economic recovery post covid.

3. To compensate for lower tax collections

Businesses were effectively shut for a quarter in FY 20-21. The lower demand impacted tax collections of the government last year (FY 2020-21) - income tax from corporations (-20%), personal income tax (-7%) and GST (-14%). While receipts of the central government declined, the expenditure increased due to reasons mentioned above.

Even for this year (FY 21-22), the budget estimates have gone haywire due to the deadly second wave. The government needs to spend more than budgeted due to higher expenses for vaccination and free extension of the free ration program. There is no scope for the centre to give up a portion of excise duty collections in these extraordinary and challenging circumstances.

4. To meet fiscal deficit targets

Due to the impact on revenues and higher spending, India’s fiscal deficit shot to 9.3% of GDP in FY 20-21, thrice than what was budgeted. For FY 21-22, it is pegged at 6.8% of GDP.

India has presented a fiscal roadmap to the world and credit rating agencies that this would gradually reduce to 4.5% by FY 2025-26.

Any major deviations may not be looked at positively by the rating agencies. India enjoys the lowest investment grade rating and any breach risks moving into the non-investment grade bucket which could have significant ramifications on our economy (from FIIs pulling out money, to loans becoming costlier, etc).

A reduction in excise duty can impact the roadmap of fiscal consolidation.

To sum up, at this juncture, every penny counts and the government has very little room to be able to provide any relief in excise duty on fuels.


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