The steps will lead to a drop in annual revenues due to lower collections, raising concerns on India’s fiscal deficit.
India has announced a series of changes to the tax structure levied on crucial commodities in a bid to insulate consumers from rising prices amid high inflation.
Finance Minister Nirmala Sitharaman announced on Saturday a cut in excise duty on petrol by 8 rupees ($0.1028) per litre and 6 rupees ($0.07) per litre on diesel.
The new tax regime on petrol and diesel could result in the government losing about 1 trillion Indian rupees ($12.8bn) in annual revenue due to the lower collection, she said in a series of tweets.
The government also removed the import duty on anthracite, PCI coal and coking coal in a bid to reduce raw material costs for local market demand.
The latest measures will be effective from May 22, the government said in a notification after the announcement by Sitharaman, who also urged state governments to follow suit with similar reductions on fuel prices keeping in line with federal plans.
A litre of petrol currently costs 105.41 rupees ($1.35), while diesel is at 96.67 rupees ($1.24) in New Delhi.
The government will also provide a new subsidy of 200 rupees ($2.5) per cooking gas cylinder to more than 90 million beneficiaries under a welfare scheme introduced for women below the poverty line.
The subsidy will have an annual revenue implication of nearly 61 billion Indian rupees ($785.6m), Sitharaman said.
“Prime Minister Narendra Modi has specifically asked all arms of the government to work with sensitivity and give relief to the common man,” she said.
The government was also working to reduce taxes on raw materials for plastic products to lower the cost of final products.
Experts said the latest moves will likely increase fiscal concerns and raise doubts about the government meeting its deficit target of 6.4 percent of GDP for 2022-2023.
Inflation has become a major headache for Modi’s government ahead of elections to several Indian state assemblies this year.
The sharp jump in inflation meant input costs escalated for businesses and the rise prompted the central bank to raise interest rates at an unscheduled policy meeting this month.
“Today’s decisions, especially the one relating to a significant drop in petrol and diesel prices, will positively impact various sectors, provide relief to our citizens,” Modi wrote on Twitter. “It is always people first for us!”