Excise duty cut on petrol, diesel could reduce inflation by 30 bps

The Centre’s move to cut excise duty on petrol by Rs 5 a litre and on diesel by Rs 10 a litre could reduce the consumer price index (CPI) inflation rate by up to 0.30 percentage points. However, not all of it will be visible in the November inflation data, which will be released in December, as the second round impact takes time to take effect.

Meanwhile, petrol prices were down by Rs 5.26 to Rs 6.77 a litre and diesel rates were lower by Rs 11.16 to Rs 12.48 per litre in the four major metros — Delhi, Mumbai, Chennai, and Kolkata — as on November 4, when the cuts were enforced, over those on November 3 and held on to those rates on November 5. However, petrol prices ruled over Rs 100 a litre in all these four metros, while diesel rates came down below Rs 100. Before the duty cut, diesel prices were below Rs 100 a litre in Delhi.

Several NDA-ruled states such as Uttar Pradesh, Himachal Pradesh, Bihar, Gujarat, Goa, Karnataka, Uttarakhand, Assam, Manipur, and Tripura have reduced value-added tax on these two fuels, which has further lowered the retail prices in these states. Uttarakhand saw an Rs 11.69 a litre decline in petrol prices and Shimla witnessed Rs 17.33 per litre lower diesel prices as on November 5 compared to November 3.

On the other hand, the measures could cost the Union government around Rs 60,000 crore in the remaining five months this fiscal year, official sources said. However, an increase in demand for fuels due to reduction in prices could somewhat alter the numbers given above.

Madan Sabnavis, chief economist at CARE Ratings, said the direct impact of the Centre's measures would be 0.18-0.2 percentage points on CPI inflation. However, the secondary impact would be around 50 per cent of the direct impact and hence could be around 0.1 percentage point, he said. “We expect around 0.3 percentage point reduction from the point of view of CPI inflation,” he said.

Devendra Pant, chief economist at India Ratings, said the direct impact of the cut would lead to a 0.15 percentage point decline in the retail headline inflation rate.

“The second round impact will depend on the extent of reduction in fuel cost passed on to consumers by producers. It may start reflecting on prices from next month or whenever truckers decide on revision in freight rates,” he said.

Rahul Bajoria, chief India economist at Barclays, said overall, the direct impact of this tax reduction would be 0.12 percentage points on the CPI in November, and it would lead to an indirect impact of 0.12 percentage point reduction in three months, bringing the total impact to 0.24 percentage points.

Yuvika Singhal, economist at QuantEco Research, said the direct and indirect impact of the Centre's steps would be 0.13 percentage points on the CPI inflation rate each. “The combined impact would be in the range of 0.25-0.30 percentage points,” she said.

The CPI cooled to a five-month low of 4.35 per cent in September from 5.59 per cent in the previous month. Petrol has a weighting of 2.19 per cent, while it is 0.15 per cent for diesel in the CPI.

Petrol’s price rise remained elevated even as it moderated to 22.26 per cent in September from 24.01 per cent in the previous month. The diesel inflation rate rose to 22.44 per cent from 22.06 per cent during this period. The inflation rate in these two items of fuels remained over 20 per cent since February this year.

ICRA Chief Economist Aditi Nayar said the first order impact of the Centre's measures would be visible in the November CPI data, which should now range between 3.5 per cent and 4 per cent, allowing a breather ahead of the next review by the RBI’s monetary policy committee.

CRISIL Chief Economist D K Joshi said the move was positive for the growth-inflation mix and would help curb fuel inflation and support growth.

“Its impact will be visible in the November CPI data, to be released by December 12. The second round effects will be visible over the next few months,” he said.