Feeling the heat of spiralling auto fuel prices, the Narendra Modi government on Thursday relented and announced a lowering of excise duty by ₹1.50 a litre. It also asked the public sector oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation — to cut prices by ₹1 a litre.

This is the second time in its tenure that the government has lowered the excise duty on auto fuels. Announcing the decision, Finance Minister Arun Jaitley told mediapersons that he had written to State governments to lower their VAT/Sales Tax by ₹2.50 a litre.

Taken together, these measures should bring down petrol and diesel prices by ₹5 per litre. That is ₹1 less than the price derived on the basis of the market-driven formulae.

Maharashtra, Gujarat cut prices

Soon after the Centre’s announcement, two BJP-ruled States (Maharashtra and Gujarat) lowered retail prices of auto fuel by ₹2.50 a litre.

The excise duty cut will be effective from midnight of October 4/5, while the OMCs’ new prices will take effect from 6 am on Friday. The government also clarified that its instruction to OMCs to absorb the spike in global prices did not mean a return to price controls.

However, the Congress party said the Centre was applying band aid on the wounds.

The decision to cut prices, the Finance Minister said, followed Brent crude oil prices touching a four-year high of $86 a barrel on Wednesday and US interest rates reaching a seven-year high at 3.2 per cent.

“Inflation in India, however, is still moderate at less than 4 per cent, and higher direct tax collections give comfort with regard to fiscal deficit,” he said, adding that domestic macroeconomic indicators are strong and stable, except for the current account deficit (CAD). The “comfortable” revenue position had created room for the duty cut, he said, and assured that the government would seek to contain the impact of the currency’s fall.

With the ₹1.50 cut in excise duty, the Centre will forgo ₹21,000 crore annually, or ₹10,500 crore in the six months left of this year. According to sources, OMCs will lose up to ₹9,000 crore a year or ₹4,500 crore for the rest of the fiscal.

Following the announcement, Indian Oil Corporation shares dropped 11.4 per cent. Hindustan Petroleum Corp closed down 13.5 per cent, while Bharat Petroleum Corp Ltd fell 12.4 per cent. Reliance Industries shares closed down 6.9 per cent, the biggest single-day fall since August 24, 2015.

“It will be a test for all States and the State ministers who were only tweeting and were indulging in lip sympathy, what will they do now and last time also only BJP and NDA led state governments reduced VAT. This time if other state governments do not do it then people will ask them.,” Jaitley said when asked how he sees response from States.

Last October when Centre lowered excise duty by ₹ 2 and appealed States to lower VAT, very few obliged. At present, 21 States have BJP or BJP-supported Government while three has Congress Governments. Rest are ruled by regional parties.

D K Pant, Chief Economist with India Ratings (IndRa) estimated that combination of cut in excise duty and VAT and price cut by OMCs, will translate in 6 per cent decline in retail prices of petrol and 6.7 per cent decline in retail price of diesel (based on prices and taxes prevailing in Delhi). The impact of this on retail inflation would be up to 16 bp (100 basis points or bp means 1 per cent).

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