Excise duty cut on petrol, diesel can result in fiscal loss of Rs 1.5 trillion: Economists

The central government has decided to cut excise duty on petrol and diesel amid rising tensions in West Asia due to the prolonged Iran war, which has raised fears of supply disruptions through the Strait of Hormuz.

The excise duty has been reduced by Rs 10 per litre on both petrol and diesel, bringing the duty on petrol down to around Rs 3 per litre, while that on diesel has effectively been reduced to zero. The move is aimed at easing cost pressures on oil marketing companies.

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The government has also reintroduced export duties on diesel and aviation turbine fuel (ATF). The Centre has imposed an export duty of Rs 21.5 per litre on diesel and Rs 29.5 per litre on aviation turbine fuel, reinstating a levy first introduced in July 2022 to curb windfall gains by refiners following Russia’s invasion of Ukraine, and later withdrawn in December 2024.

According to economists, the Rs 10 per litre excise duty cut could result in a fiscal loss of around Rs 1.5 trillion in FY27, and the additional burden on the government’s balance sheet could reduce its capacity to sustain strong capital expenditure.

“There is also a likelihood of a higher subsidy burden on the government due to fertiliser subsidy, which could lead to higher revenue slippages. We will have to see whether these costs are met by expenditure cuts,” said Madan Sabnavis, chief economist, Bank of Baroda.

Economists had earlier revised their FY27 growth forecasts downward as the escalating war in West Asia pushed crude oil prices higher and disrupted trade routes.

In its latest research report, ICICI Bank reduced its FY27 gross domestic product (GDP) growth forecast by 50 basis points to 7%.

Goldman Sachs had cut India’s FY27 growth forecast to 6.5 per cent from 7 per cent, pointing to slower exports and sticky inflation as key issues.

The war in the Middle East has pushed international oil prices up by 50 per cent to over USD 100 per barrel.

Rating agency ICRA said if the average crude oil price goes up to USD 100-105 per barrel, fuel retailers would incur a loss of Rs 11 per litre on petrol and Rs 14 per litre on diesel, respectively.