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Rise in the consumption of petrol and diesel in FY22 can absorb the cuts in cesses by Rs 4.5 per litre, without revenue loss to the Centre relative to FY2021, said ratings agency ICRA.

"ICRA projects the year-on-year (YoY) growth in the consumption of petrol or motor spirit (MS) and high-speed diesel (HSD) in FY2022 at 14 per cent and 10 per cent, respectively, on the low base of FY2021," the report said.

"Benefitting from the revival in consumption of fuels, the aggregate revenue generated from the cesses imposed by the Government of India on MS and HSD is estimated by ICRA to expand by 13 per cent or Rs 0.4 trillion to Rs 3.6 trillion in FY2022," it added.

If this additional revenue of Rs 0.4 trillion is foregone, the report said, it can support a reduction in cesses by Rs 4.5 per litre each on MS and HSD.

"Such a revenue neutral cut in cesses on fuels would shave off a modest 10 bps from ICRA's forecast of 5.25 per cent for CPI inflation for July 2021, in terms of the first-round impact, with a similar second round impact likely with a moderate lag," ICRA said.

According to Aditi Nayar, Chief Economist, ICRA, the forecasts suggest that consumption in FY2022, relative to the pre-Covid level of FY2020, will be 6.7 per cent higher for MS, and 3.3 per cent lower for HSD.

"Higher consumption of fuels should support a rise in the indirect taxes levied on them, affording a window for a partial reversal in the cess hikes that were imposed last year. Our calculations suggest that the cesses levied on MS and HSD could be reduced by Rs. 4.5 per litre each, while maintaining the total cess revenues of the GoI on these fuels in FY2022 at the FY2021 level," she said.

"Such a cut in the cess rates would offer some relief to household budgets and ease the inflationary pressures related to the rising global crude oil prices," Nayar added.

The favourable prospects of a global economic rebound brought about by the vaccine rollout optimism have resulted in a nearly uninterrupted increase in the international crude oil prices since January 2021.

Reflecting this, the report said a weaker rupee, higher cesses imposed by the GoI since March 2020 and the increase in Value Added Tax (VAT) rates by more than three-fourth of the state governments in 2020, have seen the average retail selling prices (RSP) of MS and HSD in the four Metro cities increase to record high levels of Rs 99.54 per litre for petrol and Rs 92.03 per litre for diesel as on June 25, 2021.

"Given the current scenario where domestic demand has been singed by the impact of the second wave of Covid-19, the all-time high retail prices of fuels are both weighing upon disposable incomes and consumption, and feeding into inflationary pressures," the report said.

In May 2021, the CPI inflation rose to 6.3 per cent, exceeding the upper threshold of the Monetary Policy Committee's (MPC) medium term target of 2-6 per cent.

During the last three monetary policy reviews (in February, April and June), the MPC had highlighted the inflationary pressures created by the higher cesses and VAT rates announced by the Centre and the state governments last year, and the need to unwind the same to ease the cost push pressures.