Low international prices of crude have kept petrol and diesel prices down by over Rs 5 from the beginning of the year even post the hike in excise duties. (Source: Bloomberg) Low international prices of crude have kept petrol and diesel prices down by over Rs 5 from the beginning of the year even post the hike in excise duties. (Source: Bloomberg)

The government on Monday increased the caps on special additional excise duty by Rs 8 per litre on both petrol and diesel, taking the cap to Rs 18 per litre on petrol and Rs 12 per litre on diesel. However, experts say that the move to give headroom to the government to shore up its falling revenues may still not be enough to compensate for the fall in demand due to the COVID-19 outbreak.

On March 14, the government had increased the excise duties on both petrol and diesel by Rs 3 per litre each after the fall in demand for crude and a price war between oil producing countries brought the prices of petrol and diesel down by over Rs 5 since the beginning of the year. Central and state taxes already account for 54 per cent of the price of petrol and 45 per cent of the price of diesel at pumps in Delhi. Low international prices of crude have kept petrol and diesel prices down by over Rs 5 from the beginning of the year even post the hike in excise duties.

Sunil Kumar Sinha, principal economist at India Ratings, said even if the government allowed fuel prices to fall further along with global prices, an increase in demand would be unlikely given the restrictions on movement and lockdowns around the country.

Explained: Why government raised excise duty cap on fuel amid coronavirus scare

“The consumption of both diesel and petrol will go down and this situation is unlikely to change over the next 15 day or a month,” said Sinha. He also said that due to the outbreak the government was in a situation where it will have to increase spending on areas like policing and healthcare while its revenues fall because of the pandemic.

“An increase in the special additional duty may not even compensate for the loss in revenue because of lower demand at this time,” said Sinha.

Indranil Pan, group economist at IDFC First Bank, concurred that the government may have to spend more at a time that overall revenues were falling and may need the flexibility offered by this move.

“The government doesn’t have too many levers as on the one side healthcare costs could be rising and on the other side your overall revenues may fall because of the slowdown, said Pan, adding that this situation is the reason they have given themselves the flexibility of raising the special additional excise duty.

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