Mpc’s sturdy message towards excessive gasoline excise duties

Aside from the growth-inflation discussion, this time the strongest message from the monetary policy protocol to the government is to cut fuel consumption taxes. Usually, it is the RBI governor who calls on the government to curb inflation by lowering fuel consumption taxes. But this time the news came heavily from three other members.

The strongest word against high fuel consumption taxes comes from the moderate member Ashima Goyal. “If … indirect taxes persist in inflation, it could unanchorate inflation expectations and pose challenges to monetary policy,” she writes in her minutes, adding: Rise tends to affect inflation expectations. “She argues even more strongly that” the volatility of Indian fuel prices is much is less than that of the international and the average increase is greater because taxes are not reduced so much when international oil prices rise, but they are increased when oil prices fall. A sustained rise in Indian fuel prices runs counter to the inflation target. “

Second, it indicates that fiscal consolidation is happening faster than expected as tax revenues are buoyant. The government’s cash holdings are already large.

Third, and most importantly, it suggests that the government could potentially harm itself by maintaining fuel excise taxes, thereby driving up inflation. She says, “If expected inflation increases G-sec rates by 1% and the GDP ratio of the public debt is around 100%, then government interest payments will increase by 1% of GDP. By comparison, cutting fuel taxes would sacrifice around 0.5% of GDP in revenue and have many other benefits, such as anchoring inflation expectations, reviving demand, and fairly sharing the burden of oil price shocks. “

Mridul Saggar also points out that “excise taxes on gasoline and diesel on the 6th. Model-based estimates suggest that the excise tax hike itself may have pushed headline inflation 60-80 basis points higher, which contributed to cost spike inflation.”

And finally, Michael Patra intervenes as follows: “Underlying inflation or core inflation may persist longer due to disruptions caused by the pandemic, overlaid by margin and tax increases”

The message to the government cannot be louder: firstly, the state is responsible for at least 60-80 basis points of inflation that cannot be reversed by monetary policy, and secondly, the state empties its own coffers by paying more than interest, because higher inflation leads to higher market returns, which in turn increases borrowing costs.

Hopefully these strong arguments will find some buyers in the north bloc.

First published: August 22, 2021, 7:13 p.m.