MUMBAI: The excise duty cut on petrol and diesel is credit negative for India as it reduces government revenue and increases fiscal deficit by 0.1 per cent to 3.4 per cent of FY19 GDP, though it could have limited effect on growth, said Moody’s Investors Service. According to the ratings agency, the earnings of public sector oil marketing companies would be negatively affected as they too follow the `1 per litre cut on fuel.
The agency said that because the government already met 94.7 per cent of the budgeted annual deficit as on August 2018, achieving its deficit target will likely involve compressing capital expenditure. Consequently, deficit target may slip modestly to 3.4 per cent of GDP, while the combined government deficit should remain at about 6.3 per cent, Moody’s said.
It added that the government was committed to market-based pricing, but going back to deregulation poses risks. “With state elections at the end of the year and general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated,” it said. India deregulated petrol and diesel prices in 2010 and 2014 respectively, and switched to daily revision last June.
“Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits,” Moody’s said.