The Union government has decided to lower the exorbitant rates of tax on gasoline and diesel after nearly 18 months. Millions of Indian consumers will benefit from the reduction in petrol prices of Rs 5 per litre and diesel prices of Rs 10 per litre.
According to a Business Standard analysis, the decision will cost the government close to Rs 35,000 crore. Although this appears to be a significant loss for the government, this money will remain in consumers' pockets for the remainder of the fiscal year. In other words, an amount equal to nearly 0.15 percent of GDP will be available for private consumption for five months to Indians. This is nothing less than a spending stimulus.
The Centre has received 55% of its annual receipts in the first six months of 2021-22, compared to a typical first-half average of 40%. Furthermore, the growth rate in FY20 (two years) was strong at 31%, which is comparable to the average annual revenue growth rate of 14% in normal times. Tax revenue growth is faster: 60% of the budget has been covered halfway through.
This year, economists predict a revenue surplus. According to Aditi Nayar of the rating agency ICRA, the Centre's coffers will receive Rs 1.9 trillion in additional revenue over and above the budgeted figures. Even if the fuel tax cut saves the government Rs 35,000 crore, the revenue position of the government is expected to remain strong.
Fuel price reductions at the retail level will help to reduce inflation to some extent. After all, transportation is a cost that the general public bears, and inflation in this sector is at an all-time high.
Following the Centre's decision to lower fuel taxes, some states are likely to follow suit and lower sales tax (or value added tax) on fuels. Some states, such as Tamil Nadu, have already taken the initiative and reduced VAT by Rs 3 per litre.