Planning Commission Deputy Chairman Montek Singh Ahluwalia today said duty cuts on petroleum products would have a "negative impact" on fiscal deficit, but ruled out any protracted effect on inflation due to the "inevitable" price hike.
"Certainly, the duty cuts will have a negative impact on fiscal deficit," Ahluwalia said, adding in a rising global oil price scenario increasing the retail price was inevitable. The Budget had pegged fiscal deficit for this fiscal at 4.6%, against budget estimate of 5.1% for FY11.
Keeping the oil prices low in an artificial manner would have weakened the economy and the oil sector, Ahluwalia said, adding the hikes will have a temporary effect on inflation as it will wear off in three-four months.
If the government had prolonged the fuel price hike announcement, it could have had an impact on fiscal deficit, which in turn would have impacted inflation, he explained.
Inflation, Ahluwalia said, was a global problem and "it was going to take longer than we originally thought" to tame. Core inflation stood at an uncomfortable 9.06% in May.
The government on last Friday increased diesel price by Rs 3 a litre, cooking gas by Rs 50 a cylinder and kerosene by Rs 2 per litre. It has also reduced customs and excise duties on petroleum products.
While the government abolished the 5% customs or import duty on crude and slashed the same on diesel and petrol to 2.5% from 7.5%, it also reduced excise duty on oil products from 7.5% to 2.5%.
The reduction in excise duty on diesel would lead to a revenue loss of Rs 23,000 crore this fiscal.
The price hikes would help oil companies limit their revenue loss by Rs 21,000 crore, but still would end the fiscal with about Rs 1,20,000 crore of revenue loss.
Meanwhile, Finance Secretary Sunil Mitra also said that the central government would lose about Rs 24,000 crore of revenue during the current fiscal on account of reduction in customs and excise duties on petroleum goods.
When asked about the impact of duty cuts on the government's fiscal health, Mitra said: "How it will impact [fiscal deficit], I can't say. In two months of a year, you don't decide these things."
