States have fiscal space to cut fuel by up to ₹5/litre: SBI

After the Centre's recent announcement on excise duty cut worth ₹8 per litre on petrol and ₹6 per litre on diesel, VAT cuts announced by some states are only by default. However, states have gained ₹49,229 crore from VAT (value-added tax) revenue on fuel when oil prices were increasing and they will forego only ₹15,021 crore after oil price has been downwardly adjusted through excise cut by the Centre, the latest report by SBI Research shows.

This only shows that states can further cut the oil prices. "Gains still outstrip the revenue forgone by ₹34,208 crore and hence states can further cut the oil prices," says the report, adding that states can cut diesel prices by at least ₹2 per litre and petrol prices by ₹3 per litre without impairing their VAT revenue from oil.

In terms of revenue gained when oil prices were increasing, Maharashtra earned the highest revenue, followed Gujarat and Telangana. However, fuel prices in Gujarat are much lower than Telangana and Maharashtra.

In addition to that, contrary to popular perception, state finances have improved significantly post-pandemic. So they have the necessary wherewithal to adjust taxes if so required. States’ borrowing data also shows a decline in this fiscal year. For example, their actual borrowing has been lower than the calendar figures for the past few years, except FY20, says the report.

On May 21, in a slew of measures to control the rising inflation in the economy, the central government had cut the central excise duty on petrol and diesel, and a ₹200 subsidy on LPG gas cylinders, among other measures. The excise duty cut on petrol and diesel and subsidy outgo on LPG cylinders are expected to cost over ₹1 lakh crore to the Centre.

Announcing cuts, Sitharaman had also exhorted the states to also implement similar measures and give relief to the common man.

Also, lower state borrowings can be because of a recent policy change that notifies that off-balance-sheet borrowings of states need to be adjusted against borrowings, the report says.

Taking all these factors into consideration, and if the cushion of ₹34,208 crore from oil excise is entirely adjusted such that states have no gain or loss from oil revenue over and above the budgetary estimates, states on an average can still cut diesel price at least by ₹2 per litre and petrol price by ₹3 per litre each without impairing their VAT revenue from oil.

Bigger states like Maharashtra, which have lower debt to GDP ratios, have significantly large fiscal space for lowering their tax on diesel and petrol by even up to ₹5. Also, the state’s own tax revenue to GDP of many states including Haryana, Kerala, Maharashtra, Rajasthan, Telangana and Arunachal Pradesh is higher than 7%, which is a compelling reason for them to adjust taxes on fuel, the report adds.

Making the case for bringing the fuel under GST, the report says this can reduce complexities in oil tax structure and bring down extreme volatility in oil revenues due to fluctuating crude prices.

Further, the Centre's measures to cut excise duty and provide subsidy on LPG could ease inflation by 35-40 basis points, says the report, adding that retail inflation for May could come down 10 bps from SBI's earlier projection of 7%. For the full fiscal year, inflation could remain between 6.5% and 6.7%, the report says.