The excise duty cuts on diesel and petrol will cost Rs 45,000 crore and lead to a 0.3 percentage point widening on the Centre's fiscal deficit, a foreign brokerage said on Thursday.
Going by the overall consumption, the costs of the surprise move – which came after months of concerns over high payouts at filling stations – for the entire fiscal will come at Rs 1 lakh crore or 0.45 per cent of GDP, economists at Japanese brokerage Nomura said in a report.
For the remaining months of the ongoing FY22, the cost will come at Rs 45,000 crore, which leads to an upward review of the fiscal deficit target.
The brokerage said it now expects the fiscal deficit to come at 6.5 per cent as against the earlier expectation of 6.2 per cent and underlined that it will still be lower than the budgeted 6.8 per cent target.
The central government on Wednesday announced a cut in excise duty on petrol by Rs 5 per litre and diesel by Rs 10 per litre on the eve of Diwali.
The move only partly reverses the hike in duties in 2020 by Rs 13 per litre for petrol and Rs 16 per litre on diesel, following a steep drop in oil prices, and comes on the heels of higher crude prices pushing retail prices to record highs, it said.
The brokerage said "parsimonious" spending by the government so far this fiscal has helped limit fiscal deficit in H1FY22 to 35 per cent of the budgeted target, compared with a 15 per cent overspend of budget in H1FY21.
The tax cuts should lower headline CPI inflation by 0.14 percentage points due to direct effects and up to 0.3 percentage points, if indirect effects are included.
Although, there are offsets from elevated input costs, reopening pressures and an ongoing energy crunch, it said.
Politically, high inflation remains one of the top concerns on the minds of voters, it said adding that the moves will help keep voter discontent at bay.
The timing ahead of the move will also help consumption, the brokerage said, retaining its 9.2 per cent real GDP growth for FY22.
It will also reduce the burden on monetary policy at the margin but with inflationary pressures broadening amid the continued growth recovery, the central bank will continue with its normalisation efforts, it said.
