India: Fuel duty cuts strain budget outlook – DBS

DBS Group Research’s Radhika Rao highlights India’s fiscal response to elevated global energy prices and Rupee weakness. The government has cut central excise duty on petrol and diesel to support state-owned oil marketing companies and delay pump price hikes, but this implies significant revenue loss. Persistently high energy costs and subsidies pose upside risks to the fiscal deficit in FY27.

Fuel tax cuts support consumers but cost revenue

"Late last week, the government reduced the central excise duty on petrol and diesel by INR 10/litre to support state-owned oil marketing companies (OMCs), which were absorbing losses from elevated global energy prices."

"This move lowered the need for an imminent increase in the retail pump prices to defend consumers but will entail a fiscal cost worth ~INR1.7trn (0.4-0.5% of GDP) in foregone revenues if this lasts the full year."

"Despite this move, elevated global prices and a weakening rupee suggest that the strain on fiscal books will persist, signaling that a further reduction in duties or a fuel price increase is likely to be the next step."

"Back in 2022, in the wake of the Russia–Ukraine conflict, a combination of duty cuts and pump price adjustments was undertaken to share the burden, with some degree of demand destruction also occurring as a result."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)