Excise duty cut on petrol, diesel to put pressure on fiscal deficit: Experts

New Delhi: The Centre's decision to cut excise duty on petrol and diesel will put pressure on the fiscal deficit which has been estimated at 6.4 percent of the GDP for the current financial year, experts said. The government cut excise duty on petrol by a record Rs 8 per litre and that on diesel by Rs 6 on May 21 to give relief to consumers reeling under high fuel prices that have also pushed inflation to a multi-year high.

The tax reduction on petrol and diesel will lead to a revenue loss of around Rs 1 lakh crore per year for the government.

'Fiscal deficit to rise mildly to 6.5 percent of GDP'

In addition to the fertiliser subsidy of Rs 1.05 lakh crore in the Budget (for current fiscal), the government has also announced an amount of Rs 1.10 lakh crore to further cushion farmers from the price increase due to the shortage of fertilisers.

While this, along with the lower-than-budgeted transfer of the RBI's surplus and the need for additional spending on food and fertiliser subsidies, will impart upside risks to the fiscal deficit, a large part of this would be offset by higher taxes on account of a low growth embedded in the FY'23 Budget Estimate (BE) for taxes and the low nominal GDP growth assumption, ICRA said in a report.

"We expect the fiscal deficit to rise mildly to 6.5 percent of GDP in FY2023, as against the BE of 6.4 percent," it said.

In her Budget speech on February 1, Finance Minister Nirmala Sitharaman had said the fiscal deficit in 2022-23 is estimated at 6.4 percent of the GDP, which is consistent with the broad path of fiscal consolidation announced by her last year to reach a fiscal deficit level below 4.5 percent by 2025-26.

"While setting the fiscal deficit level in 2022-23, I am conscious of the need to nurture growth, through public investment, to become stronger and sustainable," she had said.

Excise duty cut to adversely impact fiscal position

Acuit Ratings and Research Chief Analytical Officer Suman Chowdhury said the excise duty cut and rate revision on import and export of certain commodities including steel products will have adverse implications on the fiscal position for FY23 which may deteriorate over the budgeted 6.4 percent, leading to higher borrowings.

It could also lead to slower growth in exports of commodities such as iron ore and pellets contributed to stronger export growth in the last two fiscals, he said.

According to a BofA Global Research report, duty measures taken by the government recently are expected to exert pressure on the fiscal deficit.

"Incremental news articles raise sizable risk to our estimated divestment proceeds, the recently approved Rs 300 billion of dividend by the RBI to the government also falls short of budgeted numbers. All in, we now see a 40-50bp fiscal slippage risk in FY23," it said.

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