Monsoon Rainfall Cools Diesel Demand, Slowing Excise Collection Growth

Diesel Demand and Excise Collections: Slower Than Expected Growth

The Indian government’s excise duty collections grew moderately in the first half of this fiscal year, reaching ₹1.28 trillion from April to September. Although up 2.9% year-over-year, collections fell short of the targeted 5% annual growth, with diesel demand dampened by heavy monsoon rains. Data from the Controller General of Accounts (CGA) shows that while overall tax revenue rose 12%, excise on diesel underperformed due to reduced demand.

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How Diesel Excise Duty Works and Why Volume Matters

Excise duties on fuels like diesel and petrol are levied per litre, not as a percentage of price. Therefore, the government’s revenue depends on the quantity consumed. Crude oil produced domestically is also subject to a specific rate excise duty, with certain older oil fields attracting an additional cess.

Monsoon's Impact on Diesel Consumption

This year’s heavy monsoon delayed construction projects, curbing the need for diesel-powered logistics and transport. According to D.K. Srivastava, Chief Policy Advisor at EY, “Monsoons delay building activity, dampening diesel demand.” The Ministry of Finance’s monthly report for September noted that monsoon rains slowed mining and construction but bolstered agricultural activity. However, this did not significantly lift diesel consumption, as the need for diesel-powered irrigation was lower.

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Windfall Tax Partially Offsets Diesel Revenue Decline

Additional support for excise revenue came from the windfall tax on domestic crude production. This tax, levied as a special excise duty, remained higher than last year’s rate until mid-August, before slightly declining. While this revenue helped offset reduced diesel excise, it wasn’t enough to fully counterbalance weak diesel demand.

Fiscal Position: Deficit Within Target

Despite challenges with diesel excise growth, the Centre’s fiscal deficit remains manageable, aligned with the annual target of 4.9% of GDP, or ₹16.1 trillion. However, changing consumer habits and seasonal trends could continue to affect fuel tax collections, prompting a need for careful fiscal planning.

Conclusion

Heavy monsoons and a gradual shift in consumer preferences are slowing diesel demand and impacting the Centre’s excise revenue targets. As the government adapts to these changes, monitoring seasonal impacts and emerging vehicle trends will be critical for meeting revenue goals.

Also Read: India’s Service Sector PMI Surges in October: A Strong Rebound Amid Cost Pressures