Fiscal Pressure on Indian economy

Category: Global Economy Sub-category: Indian Economy
Document type: news

28-Jun-2011 | 18:20 IST | Edited by: Vishal Bagaria

The effort taken by Indian ministers to slash off excise and import taxes on crude oil and fuel products will impact its fiscal deficit target, furthering the growing concerns over the ability to adhere to the fiscal targets.

India has cut down the 5% import tax it levies on crude oil as well as slashed off the import tax on all fuel products by 5% and the excise tax on diesel to 2 rupees from 4.60 rupees.

The tax cuts will adversely impact India's target of an indirect tax collection of 3.98 trillion rupees by March 31 2012. A pressure on fiscal deficit would be the direct outcome of such a deliberate cutting down of prices.

A lowering of the fiscal deficit to 4.6% of GDP during this fiscal year from 5.1% last year, is one of the prime objectives of the planners. However, the direct taxes are being exhaustively used to pace up India's development progress and the subsidies provided are adding to the burden.

The government estimates a revenue loss of 490 billion rupees during the current financial year because of the cuts in import and excise taxes on petroleum products.

The Central Government shall be hit by a loss of approximately 240-250 billion rupees. The remainder loss shall be borne by the state governments.

Adherence to fiscal goals assumes critical importance for the second-fastest growing major economy of the world, as it targets strict fiscal discipline, partly through abolishing voluminous fuel subsidies.

Though the effort to hike diesel prices by 8% was merely a stunt to counter the losses of state-run fuel retailers, which in turn would hinder fuel subsidies, this is not much to remove the pressure on the government exchequer.

Given the revenue losses of state-operated fuel marketing companies by selling products at government still requires to compensate for the 150-200 billion rupees in oil subsidy.

A fiscal deficit forecast for India to 5.5% of GDP from 5.2% was predicted, due to the loss of revenue from cuts in indirect taxes.

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Deficit: A deficit is the amount by which a sum of money falls short of some reference amount. A government's budget deficit is the amount by which some measure of government revenues is less than some measure of government outlays.

See also article on Oil Price increases since 2003 highlighting the causes and analysis of the relatively high oil prices of the 2000s.