RBI wants government to cut fuel tax to ease inflation

‘Pump prices of petrol and diesel have reached historical highs. An unwinding of taxes on petroleum products by both the Centre and the states could ease the cost-push pressures,’ the Monetary Policy Committee (MPC) has said.

The Reserve Bank of India (RBI) on Friday suggested that the Union and state governments reduce taxes on petroleum products to provide some relief to customers who are paying record high prices for petrol and diesel.

“Pump prices of petrol and diesel have reached historical highs. An unwinding of taxes on petroleum products by both the Centre and the states could ease the cost-push pressures,” the Monetary Policy Committee (MPC) said.

The statement comes a few days after the Centre imposed an agricultural infrastructure and development cess on petrol and diesel at the rate of Rs 2.5 and Rs 4 per litre, respectively, in the Budget. However, the government proportionately reduced basic excise duty and special additional excise duty to make it a revenue-neutral exercise and also to ensure that consumers are not affected.

The Centre imposes both flat and ad valorem rates on fuel. For instance, there is a 2.5 per cent Customs duty on unbranded petrol. Along with this, on every litre, there is a Rs 14.90 countervailing duty, Rs 18 additional Customs duty, Rs 1.40 basic excise duty, Rs 11 special additional excise duty and Rs 2.5 of newly imposed cess.

Also, there is no uniformity of taxes among states.

Aditi Nayar, principal economist at ICRA Ratings, said, “Unless a cut in indirect taxes on fuels results in a sharp softening of the inflation trajectory, we expect the rate cut cycle to have ended.”

The central bank also wants the Centre and the states to create conditions that result in a durable disinflation. “This is contingent also on proactive supply-side measures,” it said.

The MPC noted that the sharp correction in food prices has improved the food price outlook, but some pressures persist, and core inflation remains elevated.

Retail food inflation fell sharply to 3.41 per cent in December, from 9.5 per cent in the previous month, pulling down overall the inflation rate to 4.59 per cent from 6.93 per cent in this period.

The RBI said the retail price inflation is expected to be 5.2 per cent in the ongoing quarter, 5.2-5.0 per cent in the first half of the coming financial year (FY22) and 4.3 per cent in the third quarter (of FY22), with risks broadly balanced.

It sees the economy growing 10.5 per cent during FY22, from a government-estimated contraction of 7.7 per cent in FY21. This is slightly lower than the 11 per cent growth pegged by the Economic Survey for FY22.

Growth in H1FY22 has been pegged in the range of 26.2 per cent to 8.3 per cent against its earlier projections of 21.9 per cent to 6.5 per cent. It forecast the economy to grow 6 per cent in Q3.

“We believe both the estimates (by the RBI) may be revised upwards given the underlying growth momentum,” said Bank of Baroda Chief Economist Sameer Narang.