The Reserve Bank of India (RBI) has raised interest rates on bank loans in a bid to curb soaring inflation. As a second step, the central government has reduced the excise duty on petrol by Rs 8 and the excise duty on diesel by Rs 6.
It has also been announced that a subsidy of Rs 200 per cylinder will be provided to nine crore households benefiting under the Prime Minister’s Free Cooking Gas Scheme.
With the clever decision to buy crude oil from Russia, India is protecting itself from shortages of petrol and diesel. The current move is the result of a delay in realizing that a slight reduction in fuel prices could prevent an economic downturn.
Only a few weeks ago, there was an unnecessary scuffle between the central and state governments over the reduction of excise duty on petrol and diesel. Opposition parties have stated they will not run in the by-elections.
Now the federal government has made significant tax cuts for its share. Following the announcement, non-BJP-ruled states including Kerala, Rajasthan and Chhattisgarh are also cutting their share of taxes. Other states may object that they will step down in an effort to reduce the price burden on the population.
Finance Minister Nimala Sitharaman has made it clear that the reduction in excise duty announced by the central government will not have any impact on the tax divide for the states. Excise duty on petrol and diesel includes basic excise duty, special additional excise duty, road construction chess tax and agricultural construction excise tax.
Of these, only the basic excise tax is shared with the states. He is pleased to point out that the current excise tax reduction on petrol will not have any impact on the tax revenue of the states as the road construction will be carried out from the Cess tax.
The current reduction in excise duty on petrol and diesel could cost the central government about Rs 1 lakh crore in the current financial year and a loss of Rs 6,100 crore on subsidies on cooking gas cylinders. Nevertheless, while the central government’s tax revenue estimate is expected to be over Rs 1 lakh crore in the current financial year, the tax cut is unlikely to affect the state on a large scale.
It is true that there was a similarly severe inflation 10 years ago. As a result, food and fuel prices have skyrocketed. There is a big difference between then and now. It was then inflation caused by economic growth. Not so now.
The economy has been in a slump for the past five years. For two years the plague stagnated the growth. Now there are the effects of the Ukraine-Russia war. So the current approach to dealing with inflation and rising prices should be different.
The federal government’s reduction in excise duty on petrol and diesel and subsidies on gas cylinders have been opposed for the past three months. Rising inflation and rising prices are having a major impact worldwide. Although India has relatively kept the situation under control, the burden on the common people, the grassroots and the lower middle class, is pushing them to the brink of despair.
Only by reducing import taxes, domestic taxes and keeping the currency depreciating can inflation be prevented from stunting growth. Import duty on palm oil, sunflower oil and soybean oil has already been reduced.
The government has also acted on the need to bring down the prices of steel and cement. The government must ensure that the tax cuts on these go to the consumers.
Inflation rose to 7.8% in April, beating the Reserve Bank’s forecast. In the case of India, indirect tax revenue is higher than direct tax revenue. Indirect taxes affect all parties equally.
A millionaire and a hired laborer pay the same amount of tax on a kilo of onions. Therefore, it is the grassroots and lower middle class that are most affected by rising food prices. The reduction in petrol and diesel prices is comforting news for them.
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