Tax cut on Petrol, Diesel will boost economy

If speculations are rife, the Government may bring cheers to the economy and millions of inflation-hit car users in the general budget as the Narendra Modi Government is likely to cut taxes on Petrol and Diesel. Not only the car users but the tax cut will also bring relief to the 'aam admi' who is trapped under the burden of high food inflation.

According to a Hindustan Times report, the move will likely lead to an immediate reduction in Petrol's retail price by a similar amount.The report further states that Pump-gate rates of Diesel may remain unchanged, despite the tax cuts, as state oil companies are baring a loss of Rs. 2 a litre currently.

Food inflation is one of major challenge in front of the BJP-led Government and Prime Minister Narendra Modi have already hinted that bitter medicine is needed to bring the economy back on track. If Government cut taxes on Petrol and Diesel than it can help to a lot extent to restore the health of Government finances and revive the floundering economy.

The latest retail inflation data showed some moderation but the consumer food price inflation is hovering around 9.6% in May. Price surged for essential food products like fruits, egg, fish, meat, milk, milk products and vegetables which are in double digits. Prices of potatoes and onions may rise due to weak monsoon leading to a shortage in their supply.

The experts have predicted that weak monsoon this year as a result of EL Nino weather phenomenon can have significant impact on food production leading to food inflation. Also the ongoing civil war in Iraq had resulted in Brent crude oil price in the international Market hit a nine-month high of USD 114 per barrel recently. India imports nearly 80 per cent of its oil demand, out of this close to 2 million barrels per day comes from Iraq, making it the second largest source of fuel for the country after Saudi Arabia. At such time the Government's tax cut policy which is likely to be announced in the general budget on July 10 will definitely bring cheers to Indian economy.

Cut in tax rates will help in curbing food inflation

Minor increase in Diesel price generally have ripple effect on agriculture as production cost for farmers rises. The food prices also surge due to rise in transportation cost. Diesel is also used by farmers to run their irrigation pumpsets, so any increase in their price can result in rise in production cost ultimately resulting in soaring prices. Apart from Diesel the other big input into agriculture is fertiliser - an industry which is a heavy user of petroleum products such as naphtha, hence fuel price rise effects the farm produce to a great extent. The new Government's move to cut tax rates will reduce production cost and help in curbing inflation.

With Assembly election round the corner in several States like Delhi, Maharashtra, Haryana, Jammu & Kashmir, Bihar, the Government is in a desperate situation to curb inflation which was BJP's prime issue while the party was campaigning for Lok Sabha election. Inflation under UPA was the highest compared to previous five-year periods. While cereals inflation was high during FY09 and FY10, premium food hardened during FY10 to FY12. Further, vegetables prices soared to keep the overall inflation high.

The Narendra Modi Government also need to check Current Account Deficit(CAD) which may widen to 2.3 per cent of GDP due to escalationg oil prices."Iraq is a concern for us... The impact (of violence in Iraq) on oil prices and supplies," a top Indian Government source said. A spurt in oil prices may widen India's CAD(current account deficit) to 2.3 per cent of GDP due to rise in oil prices. "If the Iraqi crisis prolongs and oil price moves up from the present level of USD 111 per barrel, and the rupee depreciates to 62 per dollar, CAD (Current Account Deficit) would widen to USD 50.6 billion, or 2.3 per cent of GDP," SBI said in its internal research report 'Ecowrap'.

Keeping in mind the ongoing Iraq crisis, the tax cut in petrol, diesel will also help in narrowing CAD and help in bring the economy back on track.