Consumers got some relief from record-high prices of auto fuels as Prime Minister Narendra Modi’s government and at least 11 states lowered levies to make petrol and diesel cheaper as India heads into a crucial election season.
The central government cut the excise duty on auto fuels by Rs 1.50 per litre, Finance Minister Arun Jaitley said in a press conference today. It also asked state-run oil marketers to cut retail prices by Re 1, taking the total benefit to Rs 2.5. The reduced prices will be effective from midnight today.
Jaitley urged the states to match that with an equivalent cut in the value-added tax on fuel. States ruled by Modi’s Bharatiya Janata Party or where it shares power obliged.
The relief comes ahead of the crucial state polls and in the last few months of Modi’s term before the next general election in May. Auto fuel prices jumped to a record as Brent crude surged 28 percent this year to its highest since 2014 to $86 a barrel. A weaker rupee only made imports costlier. After a similar cut in October last year, the government had so far refrained from lowering prices as it targets a fiscal deficit of 3.3 percent of the GDP for the ongoing financial year.
Jaitley downplayed fiscal implications around the fuel price cut. “The impact will be about Rs 21,000 crore for the full fiscal. Since this is for half year, the impact will be Rs 10,500 crore which is only 0.05 percent of the fiscal deficit,” he said. “I am confident we'll be able to maintain the fiscal deficit even after absorbing this.”
Auto fuel prices are revised daily after the government deregulated them. After the decision asking retailers to absorb Re 1, shares of oil marketing companies tumbled. Indian Oil Ltd. fell as much as 18.24 percent, Bharat Petroleum Corporation Ltd. declined 19 percent and Hindustan Peroleum Corporation Ltd. plunged 22 percent.
Jaitley, however, said the oil marketers are fully competent to deal with it. “Their financial position is much stronger than what it was earlier,” he said, adding that the government was not going back on fuel price deregulation.
Higher fuel prices threatened to stoke inflation. The price cut announced today will make petrol and diesel cheaper by 3.79 and 3.88 percent respectively, based on prices and taxes prevailing in Delhi, Devendra Kumar Pant, chief economist at India Ratings, said in a note. The impact of this on consumer price inflation would be 9 basis points, he wrote, adding that a matching cut in the value-added tax by states would result in retail inflation declining by 16 basis points..
States That Cut VAT
Uttar Pradesh, Assam, Chhattisgarh, Tripura, Jharkhand, Gujarat, Madhya Pradesh, Himachal Pradesh, Goa and Haryana reduced VAT by Rs 2.50 a litre on both petrol and diesel, according to tweets by their chief ministers. Maharashtra cut VAT by Rs 2.5 a litre on petrol. Jammu & Kashmir, which is under the central rule, also reduced the levy, according to ANI.
BJP-ruled Rajasthan and Karnataka, where the Congress shares power with the Janata Dal (Secular), had lowered VAT on auto fuels last month, according to media reports.
BJP leader and Assam Finance Minister Himanta Biswa Sarma called upon the Congress to instruct their government in Karnataka to cut tax more. He said if the central government can afford to lower taxes then the state governments should follow too. “When fuel price increase, the greatest beneficiary is always the state government, not the central government,” Sarma told BloombergQuint. “So state government can cut the fuel price now, as central government has cut and the cut will be now substantial.”
Thomas Isaac, finance minister of Kerala that cut VAT on fuel by Re 1 last month, doesn’t agree. Jaitley has raised tax on petrol by Rs 12 and on diesel by Rs 14 since coming to power and even after the cuts today, there's an effective tax hike of Rs 10 in place, he said.
“What he (Jaitley) has done is too little. If he is serious about giving relief to the people, reining in inflation, he should reduce at least the tax that he increased. That’s the minimum requirement. He is not doing that,” Isaac told BloombergQuint. “Therefore, the ball is still in his court, not in my court.”
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