Oil together now states must follow centre’s fuel tax cuts there’s fiscal headroom for all govts

Oil together now states must follow centre’s fuel tax cuts there’s fiscal headroom for all govts

GoI did what needed doing on Saturday by lowering excise duties on petrol and diesel as well as offering a subsidy for LPG cylinders. Not just inflation, growth is also threatened by accelerating prices. States must now follow. Opposition-governed Kerala has announced a reduction in state fuel levies. Other states shouldn’t delay – politics doesn’t come in here. The combined impact of tax cuts will provide much-needed relief to stressed household budgets and small business balance sheets.

The package of fiscal measures marks an adjustment in the overall economic policy. Many say the current spell of inflation is reminiscent of the experience a decade ago when sharp increases in food and fuel prices catalysed a more generalised rise in price level. However, there’s a crucial difference. A decade ago, elevated inflation took place on the heels of high economic growth. This time, it’s happening in the backdrop of five years of economic weakness, a pandemic shock followed by slowing growth. This requires a different approach in finding the right mix between fiscal and monetary policies.

India’s fiscal policy, both at the level of GoI and states, has been relatively tight given the current context. Even last week’s reduction in GoI’s excise duties only takes them back to the level that prevailed in March 2020. Since then, we have experienced the first annual contraction in GDP in over four decades and the subsequent recovery has been uneven. Another relevant factor is that a sharp rise in inflation has helped governments in two ways. It’s led to buoyant tax collections. Also, the growth of nominal GDP is way more than the interest on government borrowings. Therefore, there’s no threat to the sustainability of government debt.

For instance, GoI’s net tax revenue between April 2021 and February 2022 was Rs 14.88 lakh crore, almost Rs 3.75 lakh crore higher than what was collected two years ago in a pre-pandemic year. The situation is similar in most states and many of them have budgeted for a ratio of fiscal deficit to state domestic product in 2022-23 that’s lower than the cap fixed by GoI. In short, there is room for using fiscal policy as the primary tool to find the balance between keeping a check on inflation while simultaneously protecting private consumption and economic growth. RBI has no choice but to tighten monetary policy now. To do its bit, GoI will need to be nimble, keeping a watch on domestic and global factors, as this financial year progresses.