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India's fiscal deficit may go up by 0.1%; excise duty cut on fuel credit negative: Moody's

Terming government's decision to cut excise duty on petrol and diesel as credit negative for the India, global rating agency Moody's Investors Service has stated that this will reduce government revenue and increase fiscal deficit by 0.1% to 3.4% of Gross Domestic Product (GDP) in the year ending March 2019. It also said that the earning of public sector oil marketing companies (OMCs) would be negatively affected as they also absorbed Rs 1 per litre cut in their pricing. It added that these measures create downside risks to the central government's fiscal deficit target of 3.3% of GDP for financial year 2018.

The rating agency said as the government had already met 94.7% of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, it expects the central government deficit target to slip modestly to 3.4% of GDP, while the combined general government deficit (central and state) should remain at about 6.3% of GDP. It said that the government revenue from excise duties on petroleum products has more than doubled since financial year 2014. State governments charge value added tax (VAT) on fuel as a percentage of prices and have therefore benefited from rising oil prices. On OMCs, Moody's said even as the government so far has been committed to market-based pricing, going ahead there are risks to going back on deregulation. However, with important state elections at the end of this year and the general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated. India deregulated petrol and diesel prices in 2010 and 2014, respectively, and moved to daily revision in fuel prices in June 2017.

On the economic growth, the US-based agency said the fuel excise cut is expected to have a limited effect on GDP growth. Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits. It expects real GDP growth of about 7.3% in fiscal 2018 and 7.5% in fiscal 2019. However, it noted that there are some downside risks to its forecast with intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions.

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