Excise Cut Impact May Widen FY27 Fiscal Gap by Up to 0.5% of GDP

Amid rising crude oil prices and uncertainty surrounding the West Asian crisis, the Centre on Friday announced a ₹10 cut in excise duty on petrol and diesel. Crude has surged nearly 62% this month alone, compelling the government to intervene in consumer interests. As per reports, the excise duty cut is likely to cost nearly ₹1.3 lakh crore for the Centre. Oil marketing companies, including state-owned Indian Oil, Hindustan Petroleum, and Bharat Petroleum, will lose around ₹24 on every litre of petrol and ₹30 on every litre of diesel sold. However, the Centre imposed an export duty of ₹21.5 per litre on diesel and ₹29.5 per litre on aviation turbine fuel to check windfall gains amid a shortage of fuel supply in global markets following Chinese export restrictions. The move is also aimed at limiting fiscal constraints arising from the excise duty cut.

“The net fiscal cost to the Centre is estimated at INR 1tn (0.3% of GDP) for 12 months,” IDFC First Bank said in a report. “The cut in excise duty is significantly large and could be reversed once global crude oil prices decline.”

Excise cuts, export duties reshape revenue balance

Fiscal pressures could emerge in FY27 following fuel tax adjustments, with the IDFC First Bank report estimating that the reduction in excise duty on petrol and diesel could result in a revenue loss of around ₹1.8 trillion over a 12-month period. However, higher taxes on fuel exports are expected to offset part of this impact, generating an estimated ₹808 billion in additional revenues.

The eventual fiscal burden may be lower if geopolitical tensions in West Asia ease and crude oil prices decline in the second half of FY27. Under such a scenario, the government could reverse part of the excise duty cut, potentially reducing the fiscal cost to ₹588 billion, or about 0.15% of GDP, according to the report. It also flagged the possibility that windfall taxes on fuel exports could remain in place for longer, helping contain fiscal pressures. The estimates factor in a potential reduction in export volumes of diesel and aviation turbine fuel (ATF) as part of efforts to prioritise domestic supply.

Subsidies, PSU dividends add to fiscal pressure

Another factor that could affect the fiscal math is the treatment of petroleum exporters operating in Special Economic Zones (SEZs). The report cautioned that if such units are granted exemptions from export taxes, as seen in the past, the net revenue loss could exceed current estimates.

Beyond fuel-related tax changes, the report identified additional risks to fiscal consolidation stemming from higher subsidy requirements and potential moderation in dividend income from public sector undertakings. With nearly 33% of such revenues linked to oil sector companies, FY27 budget assumptions peg PSU dividends at 0.19% of GDP.

Rising LPG under-recoveries for oil marketing companies (OMCs) could further increase subsidy commitments. The report estimates that under-recoveries could reach ₹314 billion in FY27, compared with ₹220 billion in FY23 during the peak of the Russia-Ukraine crisis.

To cushion unforeseen expenditure pressures, the government has already allocated ₹1 trillion under the Economic Stabilisation Fund. Taking these factors into account, the report estimates the overall fiscal impact in FY27 could reach 0.5% of GDP.