Why Arun Jaitley's fuel price cut is bad economics

Jermaine Castillo
October 7, 2018

Several states on Thursday slashed fuel prices after the Narendra Modi-led Union Government announced a Rs 2.50 a litre cut in petrol and diesel prices. "After the implementation of revision of fuel prices on a daily basis in the a year ago, this is the highest tax cut on petrol and diesel", he said. The governments of Maharashtra, Gujarat, Chhattisgarh, Jharkhand and Uttar Pradesh - all under the rule of the Bharatiya Janata Party - have already said they will do so.

In New Delhi, petrol prices rose by 15 paise to Rs 84 a litre while diesel prices increased by 20 paise to Rs 75.45 per litre.

Chief Minister of Maharashtra, Devendra Fadnavis, has also tweeted that the state government will reduce prices of petrol and diesel, with the former now costing Rs 5 less.

He said the NDA government has an "exemplary record" of fiscal prudence and has maintained the gradual glide path since 2014 to bring down fiscal deficit.

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Finance minister Arun Jaitley on Saturday promised more steps to stabilize the rupee and to reduce current account deficit (CAD) and assured businessmen that India would be agile in its response to global trends impacting the economy.

"Excise duty to be reduced by Rs 1.50 & OMCs will absorb Rs 1".

The relief to consumers will be in three parts - centre will cut excise duty by Rs 1.5, and oil marketing companies (OMCs) will factor in Re 1 in their pricing, and states have been asked to cut Value-Added Tax as they have raked in windfall gains due to ad valorem nature of the levy that results in higher realisation whenever rates move up, he said.

Past year in October, when the oil prices were rising, the Centre cut excise duty by Rs 2.

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"In general, what's driving emerging market weakness is a stronger U.S. economy ... there is a lack of clarity on the effectiveness of rate hikes as a currency defence", said Sunil Sharma, chief investment officer with Sanctum Wealth Management. "After the cut in petrol and diesel prices, let's pray to have elections every month or perhaps every week", one tweet said.

Jaitley said it will be a test for those states whose leaders were only tweeting and indulging in lip sympathy.

Tripura too has chose to match the reduction by Rs 2.5 per liter. "So, a total of Rs 2.50 will be reduced on both diesel and petrol", said Jaitely.

Except for Mumbai, diesel prices are up by around 30 paise across the cities.

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Haryana government has also made a decision to give an additional relief of ₹2.5/litre on Petrol an Diesel to give a total benefit of ₹5/litre in the state, said Finance Minister Captain Abhimanyu.

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