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The excise duty cut on petrol and diesel is credit negative for India as it will reduce government revenue and increase fiscal deficit by 0.1 per cent to 3.4 per cent of GDP in the year ending March 2019, Moody's Investors Service said on Tuesday.
Also, 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, Moody's said.
The government on Friday cut excise duty on petrol and diesel by Rs 1.5 a litre, sacrificing Rs 10,500 crore revenue in the current financial year.
"Overall, excise duty cuts are credit negative because they will reduce government revenue collection and increase India's fiscal deficit," Moody's said in a statement.
The US-based rating agency said these measures create downside risks to the central government's fiscal deficit target of 3.3 per cent of GDP for fiscal 2018.
"Because the government had already met 94.7 per cent of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, we expect the central government deficit target to slip modestly to 3.4 per cent of GDP, while the combined general government deficit (central and state) should remain at about 6.3 per cent of GDP," Moody's said.
It said that the government revenue from excise duties on petroleum products has more than doubled since fiscal 2014. State governments charge value added tax (VAT) on fuel as a percentage of prices and have therefore benefited from rising oil prices.
The centre had appealed to state governments to cut VAT rates on petrol and diesel by Rs 2.5 per litre, following which several BJP and NDA ruled states like Maharashtra, Gujarat, Uttar Pradesh, Tripura, Assam, Jharkhand, Haryana, Himachal Pradesh and Madhya Pradesh followed suit.
On government asking OMCs to absorb a Rs 1 per litre in their pricing, 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," it said.
India deregulated petrol and diesel prices in 2010 and 2014, respectively, and moved to daily revision in fuel prices in June 2017.
Moody's 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. We continue to expect real GDP growth of about 7.3 per cent in fiscal 2018 and 7.5 per cent in fiscal 2019," it said.
However, intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions present downside risks to our forecasts, Moody's noted.
Moody's had last year raised India's sovereign rating for the first time in over 13 years to 'Baa2' on growth prospects boosted by continued economic and institutional reforms.