After holding firm, government cuts fuel rates; markets crash as rupee weakens

The Finance Minister said the situation has arisen because of international crude prices even as domestic parameters remain strong. The decision to cut, he said, was taken after a meeting with Petroleum Minister Dharmendra Pradhan.

By: ENS Economic Bureau | New Delhi | Updated: October 5, 2018 4:35:40 am
Union Finance Minister Arun Jaitley with Finance Secretary Hasmukh Adhia and Economic Affairs Secretary Subhash Chandra Garg in New Delhi on Thursday. (Amit Mehra)

With global crude prices surging and the rupee weakening, the Centre stepped in Thursday, announcing a cut of Rs 2.50 per litre for petrol and diesel effective midnight, and urging states to match the price reduction. Of the Rs 2.50 per litre reduction, Rs 1.50 per litre of excise duty cut would be borne by the central government and the impact of the remaining Re 1 per litre cut would be absorbed by oil marketing companies.

Finance Minister Arun Jaitley appealed to state governments to match the Centre’s cut in fuel prices, following which BJP-ruled states — Maharashtra, Gujarat, Uttar Pradesh, Madhya Pradesh, Himachal Pradesh, Jharkhand, Haryana, Assam, Arunachal Pradesh, Tripura, Chhattisgarh, Goa and Jammu and Kashmir which is under Governor’s rule — also announced relief of another Rs 2.50 per litre, taking the total price cut to Rs 5.00 per litre.

The move to make state-owned oil firms absorb Re 1 per litre was seen as a return of government control over pricing, and stocks of IOC, BPCL and HPCL tanked. The decision to cut excise duty by Rs 1.50 per litre, Jaitley said, will cost the Centre Rs 10,500 crore this financial year. He, however, said that the government remained committed to meeting the fiscal deficit target of 3.3 per cent of the GDP for this financial year.

“The total impact for the full fiscal is about Rs 21,000 crore. Since it will be for half a fiscal, so the impact will be Rs 10,500 crore in the current fiscal, which is only 0.05 per cent of the fiscal deficit. Absorbing this Rs 10,500 crore in increased collection and maintaining fiscal deficit, I am very confident we will be able to maintain that. We are committed to the 3.3 per cent figure, we will maintain that,” he said.

The Finance Minister said the situation has arisen because of international crude prices even as domestic parameters remain strong. The decision to cut, he said, was taken after a meeting with Petroleum Minister Dharmendra Pradhan Wednesday and further inter-ministerial consultations Thursday.

“We will speak to the state chief ministers so that they immediately announce Rs 2.50 (per litre) reduction in VAT, so that consumers immediately get a relief of Rs 2.50 (per litre) from Centre plus Rs 2.50 (per litre) from states which is Rs 5.00 (per litre) relief in price of petrol and diesel,” he said.

Jaitley said states have gained with the rise in global crude prices as their levies are ad valorem, while the Centre’s levy is a fixed levy. “Central revenue is a fixed revenue whether crude price is $60 or $85, we get a fixed excise duty. The VAT imposed by the states is ad valorem, some states have it up to 31 per cent, on an average it is 29 per cent. So when crude price rises, Centre’s revenue remains fixed per litre. However, states revenue rises because they levy average 29 per cent VAT on the increased prices. So I am writing to all state governments, saying like the Centre is absorbing 2.50 rupees per litre through revenue and OMCs, an equivalent amount should also be absorbed by state governments through VAT,” he said.

A rupee per litre cut in excise duty leads to a revenue loss of about Rs 14,000 crore to the Centre, so a Rs 1.50 per litre cut results in a loss of Rs 21,000 crore for the full year and since only six months remain in this financial year, the impact would be of Rs 10,500 crore, a senior government official said.

In June this year, Jaitley had said that with higher revenues, the government had been able to spend more on infrastructure, rural India and social sector schemes while maintaining fiscal prudence and keeping the fiscal deficit on the downward glide path. “Relief to consumers can only be given by a fiscally responsible and a financially sound central government, and the states which are earning extra due to abnormal increase in oil prices,” he said in a blog.

On the suggestion of a cut in tax on oil by Rs 25 per litre, Jaitley had called it a “Trap” suggestion. “It is intended to push India into an unmanageable debt — something which the UPA government left as its legacy. We must remember that the economy and the markets reward structural reforms, fiscal prudence, and macro-economic stability. They punish fiscal indiscipline and irresponsibility,” he had said.

Last month, some states such as Rajasthan, Karnataka and Andhra Pradesh had reduced VAT on fuel. Since mid-August, the price of petrol has risen by Rs 6.86 a litre and diesel by Rs 6.73 — the most in any six-week duration after daily price revision was introduced mid-June last year.
Asked if this decision means going back on deregulation of oil prices, Jaitley said the government is not going back on it.

“We are not going back on deregulation because the oil companies will still continue to factor in price on a regular basis but the fact is we have to react to a situation where if without impacting the fiscal deficit I can give relief and our ability to give relief will only be when our fiscal position is able to absorb it,” he said.

He said rising global crude oil prices and interest rates in US have impacted stock and currency markets worldwide, but India’s other domestic indicators are strong and stable. “Except for the current account deficit, which is directly linked to the oil prices, the other data is extremely quite encouraging,” he said.

Brent, the benchmark for more than half the world’s oil, has touched $86 per barrel mark, the highest in four years. Also, the rupee dropped to its lowest ever level of 73.77 against the dollar, that has resulted in expensive crude imports. Crude petroleum attracts nil customs duty, 20 per cent oil industry development cess and Rs 50 per metric tonne as National Calamity Contingent Duty (NCCD). At present, a customs duty of 2.5 per cent is levied on petrol and diesel, while the excise duty is levied at Rs 19.48 a litre for petrol and Rs 15.33 a litre for diesel. State sales tax or VAT varies from state to state.

Unlike excise duty, VAT is ad valorem and results in higher revenues for the state when rates move up. The government raised excise duty nine times between November 2014 and January 2016 to shore up finances as global oil prices fell. It cut excise duty just once by Rs 2 per litre in October last year.

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