Economists bat for fuel tax cut to rein in inflation

Non monetary measures may be needed to rein in inflation from rising crude prices. Direct impact of a $10 per barrel increase in crude prices would add upto 23 basis points (bps) to inflation. Economists are batting for a cut in fuel tax which is inflating retail prices.

Global prices of Brent and crude oil prices in India during January -February are lower than the comparable period year ago. However, at the pump, retail prices have gone up on an average 20-25% year-on-year due to high domestic excise taxes. In mid-February, the retail selling price of petrol was 2.8 times the base price of oil. “That is because, taxes (centre and states) on petrol are 170% of the base price, keeping retail prices high” said Radhika Rao, India economist at DBS. “Modest cuts in excise rates are likely, but not sharp (as it remains a key revenue source; contributed 0.7% of GDP) and thereby underpinning transport costs, in the inflation basket”

Inflation has fallen under 6%, the upper tolerance limit. But the RBI’s RBI’s Monetary Policy Committee(MPC) minutes also flags members’ concerns and warning that core inflation needs monitoring, particularly due to rising global commodity and crude prices.

Every $10 per barrel movement in oil price can push inflation higher by 20-30bps, according to an RBI study. ” For India, the relentless hardening of international crude prices is worrisome, especially as their impact on inflation is amplified by disproportionately high excise duties” said RBI deputy governor, Michael Patra, an internal member of the MPC in the minutes released earlier this week.

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Higher commodity prices are translating into higher inputs costs, especially in an environment in which demand is recovering. ” Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel – in a co-ordinated manner by centre and states – are critical to contain further build-up of cost-pressures in the economy” noted RBI governor Shaktikanta Das in the minutes.

BoA Securities has raised its FY’22 Center’s fiscal deficit by 30bps to 7.5% of GDP, expecting Rs5 per litre oil tax cut. Besides, the current account deficit too could widen along with a drain on foreign exchange reserves. the firm has also raised its current account deficit forecast by 30bps to 0.8% of GDP and cut RBI forex intervention by $9bn to $36bn in FY’22, implying a slowdown in forex reserves pile-up.



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