Higher nominal GDP may give Centre a leeway to cut duty on petrol, diesel

The government may get a lever to cut excise duties on petrol and diesel to ease the burden of rising global crude prices on the common man and yet not disturb its Budget Estimates. 

The lever may be provided by the new nominal economic growth number in the second Advance Estimates and conservative assumption of economic expansion in the Budget for 2022-23.

The second advance estimates have pegged the economic size at Rs 236.44 trillion against Rs 232.15 trillion projected by the first Advance Estimates for the current fiscal year.  On the second Advance Estimates number, the Budget assumption of Rs 258 trillion GDP at current prices for 2022-23 means just 9.1 per cent growth.  This growth seems to be quite low, though there is uncertainty around the impact of the Russia-Ukraine war on the world's and India’s growth. 

Even the assumption of 11.1 per cent growth for FY23 by the Budget on the basis of first advance estimates is considered by many as underestimation. 

Former RBI governor C Rangarajan believes it would be 13 per cent, though his projection came before the war. ICRA chief economist Aditi Nayar pegs the growth at 13-14 per cent. If the economy really grows by 13 per cent, then nominal GDP in the next fiscal year will be Rs 267.18 trillion on the basis of the second Advance Estimates for this fiscal year. This would be Rs 9 trillion more than the amount assumed by Budget.  

This will have repercussions for tax collections, which are taken as Rs 27.5 trillion for FY23 by the Budget.  If the same GDP-tax ratio of 10.66 per cent is assumed as given in the Budget, tax mop-up would be Rs 28.47 trillion for 2022-23. However, the government may have to cut excise duty to ease the burden of any price hike in petroleum, post-counting day. 

Estimates have put the revenue loss to the exchequer at Rs 1 trillion from excise duty cuts. For instance, while SBI — in its research note — had pegged the loss to around Rs 1 trillion, ICRA has projected it to be around Rs 92,000 crore. That is, if the government reduces excise duty on petrol and diesel to pre-pandemic rates. Based on the tax structure and considering Brent crude price of $100-$110 per barrel, SBI said diesel and petrol prices should have been higher by Rs 9-14 each by now.

However, due to the Assembly elections, oil marketing companies have artificially suppressed petrol and diesel prices at the level that prevailed during Diwali. Then, the Centre had cut excise duty on petrol by Rs 5 a litre and diesel by Rs 10 a litre. This was followed by cuts in value-added tax (VAT) by various states. 

As such, this revenue loss would be offset by higher tax revenues as cited above. Average daily price was $89.34 a barrel for the Indian basket of oil in November 2021. This has risen to $108.7 in February 2022. If the government cuts cess on excise duty, as it did on November 4, it may have to bear the burden itself. In that case, the Rs 1 trillion extra money that it will get from taxes may not be enough. Around 41 per cent of tax mop-up go to the states, while the entire cess is retained by the Centre only.

Nayar expected the gross tax revenues to exceed by Rs 0.5-0.9 trillion compared to the Eevised Estimates. This, she said, made the tax growth given in the Budget estimates for tax collections in FY21 quite modest. 

The Budget has projected 9.6 per cent growth in tax collections for FY23. If tax collections rise Rs 0.5-0.9 trillion in FY22, the Budget numbers would mean just 6.1-7.8 per cent growth rate in tax mop up during FY23. Moreover, nominal GDP assumed in the Budget is only 9.1 per cent higher than the advance estimates, Nayar said. 

“Both these suggest that gross tax revenues, excluding excise duty, could be appreciably higher than estimated in the FY23 Budget estimates. This would afford a rollback in excise duty to the pre-pandemic level at a cost of Rs 0.9 trillion,” she said.