Govt ready to ride out political storm; FinMin against excise cut on fuel

The government does not want to take any populist measures - and derail the fiscal deficit target - in an election year

Finance ministry officials have informed the political leadership that any cut in excise duty, despite petrol and diesel prices touching record highs, was ill-advised if the government wanted to stick to fiscal deficit targets. The leadership has also expressed willingness to ride out any political storm, said sources.

The fiscal deficit target for 2018-19 or FY19 is 3.3 per cent of gross domestic product (GDP). The petrol price in Delhi on Wednesday was Rs 79.4 per litre; for a litre of diesel, one would have to shell out Rs 71. 43.

The government, however, does not want to take any populist measures — and derail the fiscal deficit target — in an election year. This is important, especially in the light of lower-than-targeted goods and services tax (GST) collection.

Senior government officials said Finance Minister Arun Jaitley had sought their views on the matter.

“The ministry has reiterated its earlier stance that for every rupee per litre cut in excise duty,” said the official. “The Centre will forego revenues worth Rs 140 billion.”

He also said, “We are aiming for monthly revenues of at least Rs 1 trillion from the GST. We are collecting about Rs 930-950 billion. The states have a buffer, in the form of compensation. We do not.”

Another official said the burden of reducing fuel prices was more with the states than with the Centre. “Even if the Centre cuts excise duty, any price drop will be temporary if crude prices and the rupee do not reach favourable levels,” the official added.

Sticking to its anti-populist stance, the government is willing to ride out a political storm.

“The government has provided sops to the middle and the salaried classes through cuts in the GST rates for a number of products,” a second official said.

The first official, quoted earlier, said there were also concerns regarding dividends from state-owned companies, banks, and disinvestment. The fiscal deficit target already looked challenging and any cut in excise duty would add to the fiscal pressure, the official said.

The GST collection plummeted to the lowest in FY19 in August, as consumers deferred purchase of over 100 items in July. The revenue for August stood at Rs 939.6 billion; in July, it was Rs 964.8 billion to, according to the official data released last weekend.

The collections are expected go down even further in September, when the full impact of the rate cut comes through. It has remained below the Rs 1-trillion target for four months.

The Centre’s Budget Estimate from dividends paid by public sector units (PSUs) and banks (including the Reserve Bank of India, or the RBI) combined is Rs 1.07 trillion. The RBI has paid a surplus of Rs 500 billion for its July 2017-June 2018 fiscal year. This is almost the entire target for dividends by state-owned banks, whose balance sheets continue to suffer from a high level of stressed assets.

Stressed assets in sectors such as steel and power are also expected to hit the dividend-paying ability of PSUs. State-run steelmaker SAIL has informed the government that it is not in a position to pay dividend for FY18, as it suffered a loss of Rs 2.9 billion.