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This article is more than 3 month old.

MPC’s strong message against high excise on fuels

Mini

A persistent rise in Indian fuel prices is at odds with inflation targeting.

MPC’s strong message against high excise on fuels
Aside from the growth-inflation discussion, the strongest message from the monetary policy minutes this time is to the government to reduce fuel excise duties. Normally it is the RBI governor who urges the government to help curb inflation by reducing fuel excise duties. But this time message has come strongly from three other members.
The strongest word against high fuel excise duties comes from the dovish member Ashima Goyal.  “If... indirect taxes impart persistence to inflation, this could de-anchor inflation expectations and pose challenges for monetary policy, “ she writes in her minutes, adding that ,” Research shows that while temporary commodity spikes are looked through, a persistent rise tends to affect inflation expectations” She proceeds even more strongly to argue that “the volatility of Indian fuel prices is much lower than international and average rise is more since taxes are not decreased as much when international oil prices rise, as they are increased when oil prices fall. A persistent rise in Indian fuel prices is at odds with inflation targeting.”
Secondly, she points out that fiscal consolidation is happening faster than expected as tax revenues are buoyant. Government cash balances are already large.
Thirdly and most importantly she points out that the government may actually be hurting itself by keeping fuel excise and hence pushing up inflation. She says “if, expected inflation raises G-secs rates by 1%, and the public debt GDP ratio is about 100%, government interest payments will rise by 1% of GDP. Compared to that, a cut in fuel taxes would sacrifice about 0.5% of GDP in revenues and have many other benefits such as anchoring inflation expectations, reviving demand as well as enabling a fair sharing of the burden of oil price shocks.”
Mridul  Saggar also points out that, “as on May 6, 2020, excise duty on petrol and diesel was hiked by 44 per cent and 69 per cent, respectively and has not been reversed in face of fiscal constraints. Model-based estimates suggest the excise duty hike itself may have pushed headline inflation higher by 60-80 bps, adding to cost-push inflation.”
And finally Michael Patra chips in as follows, “underlying or core inflation may remain stubborn for longer due to disruptions caused by the pandemic, overlaid with increases in margins and taxes”
The message to the govt can’t be any louder: Firstly government is responsible for at least 60-80 bps of the inflation, which cannot be reversed by monetary policy and secondly, the government is draining its own coffers by paying more as interest because higher inflation is leading to higher market yields which in turn pushes up its cost of borrowing.
Hope these strong arguments find some takers in North Bloc.
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