A man refuels a vehicle at a petrol pump, New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

With Elections Over, Modi Raises Taxes on Fuel to Cut Budget Gap

(Bloomberg) -- Prime Minister Narendra Modi increased taxes on transport fuels, opting for fiscal prudence over populism almost immediately after returning to power with a bigger mandate.

“Crude prices have softened from their highs,” Finance Minister Nirmala Sitharaman said in her maiden budget speech in parliament on Friday. “This gives me room to review excise duty and cess on petrol and diesel.” Federal taxes on gasoline and diesel -- the most used transport fuels -- have been increased by 2 rupees a liter each.

With Elections Over, Modi Raises Taxes on Fuel to Cut Budget Gap

Increasing taxes on transport fuels will shore up the government’s revenues, helping Modi to narrow the budget deficit and spend on infrastructure to spur economic growth. Sitharaman said the nation needs an investment of 20 trillion rupees annually on infrastructure. Other avenues for raising funds include asset sales and selling sovereign bonds overseas.

Friday’s measure will increase the special additional excise duty on gasoline to 8 rupees a liter and diesel to 2 rupees a liter. Road and infrastructure cess will rise to 9 rupees a liter on both the fuels.

“Increase in excise duty and cess on sale of petrol and diesel shows that the sector remains a predominant source of revenue mobilization for government,” according to Debasish Mishra, a partner at Deloitte Touche Tohmatsu in Mumbai. The higher levies are expected to generate about an additional 300 billion rupees for the federal government annually, he said.

India’s petroleum sector contributed 3.65 trillion rupees to the federal government during the year through March 31, making up 28% of its revenue receipts.

Soon after Modi came to power in May 2014, crude oil prices slid, allowing his government to create a buffer through successively increasing levies. Later, when pump prices soared to near record levels after crude’s rise, the government cut taxes twice to offer relief to consumers in the world’s fastest growing oil user.

Brent oil has fallen almost 18% in the past year because of oversupply and fears of shrinking global demand amid trade wars, forcing producers to extend output reductions to at least March.

“The budget has taken a leap of faith in taking a view that there will be a benign oil price regime,” Mishra said.

©2019 Bloomberg L.P.

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