By Nageshwar Patnaik in Bhubaneswar, May 25, 2022: The Narendra Modi government has a long list of challenges to tackle at the moment. From growth revival to job creation to land and labour reforms, there are many economic challenges that need Modi government’s intervention. But the problems of inflation and unemployment keep haunting the present government most.

In an apparent bid to tame inflation to some extent, Modi government has cut excise duty on petrol by Rs 8 per litre and that on diesel by Rs 6 per litre to give relief to consumers battered by high fuel prices that have also pressed inflation to a multi-year high. The decision is primarily at cooling the surge in inflation.

Retail inflation had risen to an eight-year high of 7.9 per cent in April, while wholesale inflation has been in double digits for 13 consecutive months, according to recent data. WPI or wholesale price inflation touched a record high of 15.08 per cent in April on price rise across all items. Retail inflation too rose to a near eight-year high of 7.79 per cent in that month, remaining above the RBI’s inflation target for the fourth straight month.

Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control. The central government had so far resisted calls for a cut in excise duty and instead asked the state government to lower VAT or sales tax to provide relief to common people.

However, coming under pressure, the Centre has cut fuel taxes for second time in recent months. In November last year, the Centre had lowered the excise duty on petrol by Rs 5 and by Rs 10 on diesel. Then , 21 states and some Union Territories had followed suit, cutting the VAT. The excise duty cut will translate into a reduction of Rs 9.5 a litre on petrol and Rs 7 a litre on diesel after taking into account its impact on other levies.

With the latest cut, the government has brought the excise duty back to pre-pandemic levels. The duty cut has a revenue implication of Rs 1 lakh crore annually for the Centre, which coupled with the earlier duty cut of November 2021 will result in a total revenue loss of Rs 2.2 lakh crore a year, the finance minister has said.

If state governments follow suit this time also, the relief could be higher. The reluctance to reduce excise duty and VAT on fuel stems from the fact that it constitutes an important source of revenue for both the Union government and the states. Prior to this cut, taxes imposed by the Centre and states accounted for almost 43 per cent of the retail selling price of petrol. But it is possible that this loss in revenue is offset in part by higher collections through other sources. As per some analysts, the government’s tax revenues will exceed budget estimates by around Rs 1.3 lakh crore, even after this cut.

Sitharaman also announced that the government will give Rs 200 per cylinder subsidy to Ujjwala Yojana beneficiaries for 12 cylinders in a year to help ease some of the burden arising from cooking gas rates rising to record levels.

Interestingly, the government had increased the excise duty on petrol by Rs 10 in 60 days and has reduced it by Rs 9.50 claims to have given common people big relief. Prior to the reduction of taxes on petrol and diesel by the Union Government in November 2021, the levy of tax, including cesses and surcharges on petrol was Rs 32.90 per litre and Rs 31.80 per litre on diesel.

Though the Centre had reduced the taxes, it is still higher than the 2014 rates by Rs 10.42 per litre for petrol and Rs 12.23 for diesel.

Total central tax on petrol before this duty cut was Rs 27.90 per litre, while basic excise duty was only Rs 1.40 a litre. Out of Rs 21.80 a litre total central tax on diesel, basic excise duty was Rs 1.80. Special additional excise duty of Rs 11 a litre on petrol and Rs 8 per litre on diesel was levied. An Rs 2.50 a litre agriculture infrastructure and development cess (AIDC) was levied on petrol and Rs 4 per litre on diesel. Petrol had Rs 13 a litre additional excise duty in form of RIC and Rs 8 of such tax was levied on per litre of diesel, which has been cut now.

Alongside, the government also reduced the customs duty on raw materials and intermediaries for plastic products and iron and steel. Undoubtedly, these decisions are driven by the desire to cool the surge in inflation — recent data showed that retail inflation had risen to an eight-year high of 7.9 per cent in April, while wholesale inflation has been in double digits for 13 consecutive months.

At the same time, fiscal and monetary policies are needed at this juncture to curb inflation. As per some analysts the cut in fuel taxes could help reduce inflation directly by around 20 basis points in June when its full impact will be visible. The second-round effects are likely to be equally strong.

India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.

With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India. They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.