New Delhi: Rating agency Moody’s said on Tuesday that last week’s excise duty cut on fuel by the government will increase the fiscal deficit and will have a limited effect on GDP.
“The excise cuts will reduce the government revenue by `105 billion (about $1.4 billion) or 0.05 per cent of GDP for the remainder of fiscal 2018, which ends in March 2019,” said Moody’s.
It said that these measures create material downside risks to the Central government’s fiscal deficit target of 3.3 per cent of GDP for fiscal 2018.
“Because the government had already met 94.7 per cent of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, we expect the Central government deficit target to slip modestly to 3.4 per cent of GDP, while the combined general government deficit should remain at about 6.3 per cent of GDP,” said Moody’s.
It said that the government revenue from excise duties on petroleum products has more than doubled since fiscal 2014.
“Unlike the Central government, state governments charge VAT on fuel as a percentage of prices and have therefore benefited from rising oil prices,” said Moody’s.
It said that until now, fuel price deregulation had remained broadly on track with the government continuing to stress its commitment to maintaining excise duty rates and market-based pricing. “However, with important state elections at the end of this year and the general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated,” the ratings agency said.