Oil, Gold Duty Hikes Non-Inflationary, To Boost Government Revenue, Say Economists
Here's what economists made of the government's oil, gold duty tweaks.
The government's levy of windfall taxes on oil and gold will be non-inflationary and a positive for its fiscal finances, according to economists. But there is uncertainty on how long these new taxes will continue.
The government stepped in to curb export of petroleum products by imposing special additional duties on export of petrol and diesel effective July 1, according to a notification. A special additional excise duty of Rs 6 a litre has been imposed on export of petrol, and Rs 13 a litre on diesel.
The government imposed special additional excise duty on domestic production of petroleum crude of Rs 23,250 a tonne and aviation turbine fuel of Rs 6 a litre.
It has provided some relief in form of exemption to entities whose output in the last fiscal year (FY22) stood below 2 million barrels and also on excess production over FY22's level.
India also raised the customs duty on gold from 10.75% to 15% to curb imports amid the country's widening trade deficit and a rupee that tracked 79-levels on Friday.
Here's what economists make of the moves:
Nomura
The measures announced are largely non-inflationary and are meant to ease pressure on the twin current account and fiscal deficits. The increase in the gold import duty would add only 0.05% to headline CPI inflation in FY23. It will raise domestic gold prices and discourage gold consumption, but only at the margin.
Export taxes on petroleum products could lower oil product exports, more than offsetting any benefit (from lower gold imports) on the current account.
Maintains forecast that the current account deficit will widen to 3.3% of GDP in FY23, from 1.2% in FY22.
Measures are positive for the government's finances; since these announcements are effective July 1, the benefit to the government will accrue for nine months (July-March) in this financial year.
Prior to these announcements, Nomura had estimated that the fiscal deficit was tracking around Rs 2.2 lakh crore above budget estimates due to higher subsidies (food, fertiliser), cut in fuel excise duty and a likely slip in dividend flows, which was partly being offset by higher tax collections.
The announcements could narrow the fiscal slip to Rs 1.1 lakh crore, which still points to an upside risk to its fiscal deficit forecast of 6.8% of GDP in FY23.
There is uncertainty on how long these new taxes will continue. The Finance Minister mentioned that the government would assess the oil levy impact every fortnight.
Nomura now expects a recession across major global economies, which will also weaken India’s growth outlook and weigh on tax collections later in the year.
Emkay Research
The windfall tax on the production of petroleum crude and the excise duty on exports of petrol, diesel, and ATF will boost the government's revenue by Rs 1.35 lakh crore, implying an effective revenue gain of Rs 1 lakh crore for the remaining nine months of FY23.
Emkay said an "auto-adjusting" ad-valorem tax instead of a special duty could have been more optimal; in case of sharp moves in oil markets, the duty would need to be tweaked by policymakers, especially as downside risks are unprotected.
While this move can largely offset an earlier excise duty cut on fuel prices, Emkay said it is predominantly aimed at funding the oil retailers' under-recoveries on auto-fuels and LPG owing to the prevailing price freeze.
Does not rule out some more excise cuts later, implying possible retention of oil marketing firms' margins to some extent and also some government revenue offset.
High windfall taxes on upstream companies or oil explorers could impact the government’s dividends from Oil India Ltd. and Oil and Natural Gas Corp, albeit marginally.
Overall, Emkay assumes net estimated gains of 0.2-0.3% of GDP on fiscal revenues.
The gold duty hikes could also impact gold import volumes and counter high-duty gains. In conjunction with earlier fiscal measures, and the other possible push and pulls from tax and non-tax revenues and subsidies, the FY23 GDP growth could now slip by 0.25 points to 6.65%.
The indirect import and export curbs by duty tweaks aim to reduce impending pressure on current account deficit, and thus the currency. This policy action comes after the RBI’s consistent intervention in all currency trading spaces to signal its support.
Complementary policy efforts from both fiscal and monetary sides essentially reflect the looming pain on the balance of payments deficit this year and the external imbalances thereof.
Emkay sees a sharp BoP deficit of Rs 4.8 lakh crore, CAD/GDP at 3.2% in FY23 and basic BoP deficit worsening to levels seen last in 2013.
RBI should orderly let the exchange rate adjust to new realities.
IDFC First Bank
Measures could significantly reduce fiscal slippage risks if the taxes are maintained for the remainder of fiscal. The fiscal revenue to the centre is estimated at Rs 72,000 crore in FY23.
Countering some of pressure from higher subsidy cost and revenue foregone from fuel excise duty cuts, IDFC estimates centre’s fiscal slippage could be limited to Rs 82,000 crore. Under such circumstances, extra-g-sec issuance would not be needed, as the funding requirement could be covered via cash balances/t-bill issuance.
The windfall gains tax on domestic crude producers is expected to generate revenues worth Rs 50,000 crore in FY23 (July to March) and the tax on fuel exports is estimated to generate revenues worth Rs 22,000 crore, assuming a reduced quantity of exports.
Net tax collections (after transfer to states) to exceed budget estimate by Rs 1.9 lakh crore. The tax collection estimate also incorporates stronger nominal FY23 GDP growth of 19% v/s budget estimate of 9% (over FY22 actuals).
Fiscal slippage is still expected, due to subsidy expenditure (food and fertiliser subsidy) exceeding budgeted levels by Rs 2.4 lakh crore. Another source of fiscal slippage risk is the lower-than-expected RBI dividend of Rs 30,300 crore. The budget had assumed an Rs 73,900 crore dividend from RBI and PSBs. Overall, we estimate centre’s fiscal slippage to be limited at Rs 82,000 crore in FY23, assuming no cuts in other expenditures and provided above fuel taxes are maintained.
Kotak Economic Research
Levies will help boost the central government’s finances and offset losses from excise duty cuts on petrol and diesel. If the levy continues for the rest of FY23, the government could garner close to Rs 1 lakh crore.
As a base case, we assume that the levy continues and accordingly, revise down our FY23 GDP to 6.5%. If the gains fructify, it will help in easing risks of higher-than-budgeted borrowings.
The government does not expect any implication of these measures on prices of fuel products.
The government also increased the customs duty on gold imports to 15% from 10.75%. Kotak does not factor in lower gold imports yet.
Assuming that the duty/cess continue for rest of FY23, Kotak estimates excise duty collection at Rs 3.8 lakh crore compared to its earlier estimate of Rs 2.8 lakh crore. The proceeds will accrue entirely to the Centre.
Kotak had factored in additional subsidies and excise duty losses to pencil in GDP at 6.8%. With the recent measures, it revises down GDP estimate to 6.5% and remove the need for higher dated securities borrowings.