An employee fills a customer’s motorbike’s tank with gas at a Reliance petrol Station in Hapur, India (Photographer: Amit Bhargava/Bloomberg News.)

Fuel Excise Duty Cut Is ‘Credit Negative’ For India, Says Moody’s

The excise duty cut on petrol and diesel is “credit negative” for India as it will reduce the government’s revenue, Moody’s Investors Service said on Tuesday. This will lead to an increase in fiscal deficit by 0.1 percent to 3.4 percent of gross domestic product in the financial year 2018-19, the rating agency said.

The earnings of public sector oil marketing companies would be “negatively affected” as they also absorbed the Re 1 per litre cut in their pricing, Moody’s said.

The government on Friday cut excise duty on petrol and diesel by Rs 1.5 a litre, sacrificing Rs 10,500 crore revenue in the ongoing financial year.

Also read: Petrol, Diesel To Be Cheaper As Government, States Cut Prices

The U.S.-based rating agency said these measures create downside risks to the central government’s fiscal deficit target of 3.3 percent of GDP. The fuel excise cut, it said, is expected to have a limited effect on GDP growth.

“Because the government had met 94.7 percent 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 percent of GDP, while the combined general government deficit (central and state) should remain at about 6.3 percent of GDP,” Moody’s said.

It said the government revenue from excise duties on petroleum products has more than doubled since FY14. State governments charge value added tax on fuel as a percentage of prices and have therefore benefited from rising oil prices.

The central government had appealed to state governments to cut VAT rates on petrol and diesel by Rs 2.5 a litre. Several Bharatiya Janata Party and National Democratic Alliance-ruled states like Maharashtra, Gujarat, Uttar Pradesh, Tripura, Assam, Jharkhand, Haryana, Himachal Pradesh and Madhya Pradesh followed suit.

Also read: Government’s Move To Cut Fuel Prices May Hit Private Retailers

On government asking oil marketing companies to absorb Re 1 a litre cut in their pricing, Moody’s said even as the government so far has been committed to market-based pricing, there are risks to going back on deregulation.

“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,” it said.

India deregulated petrol and diesel prices in 2010 and 2014, respectively, and moved to daily revision in fuel prices in June 2017.

“Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits. We continue to expect the real GDP growth of about 7.3 percent in FY18 and 7.5 percent in FY19,” it said.

However, intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions present downside risks to our forecasts, Moody’s said.

Also read: Fuel Price Cut May Dent Oil Companies’ Ebitda By Rs 6,500 Crore: Moody’s

Moody’s had last year raised India’s sovereign rating for the first time in over 13 years to “Baa2” on growth prospects boosted by continued economic and institutional reforms.