New Delhi:Under attack from rivals and with Assembly elections round the corner, the Centre on Thursday cut petrol and diesel prices by Rs 2.50 per litre, a decision that was followed by several BJP-ruled states, giving an overall relief of Rs 5 per litre to the consumer.
The Centre's decision will result in a revenue loss of Rs 10,500 crore in six months, Finance Minister Arun Jaitley said while announcing the much sought-after relief and asking states to effect a similar cut.
He told a press conference that the cut will be effected through slashing of excise duty to the tune of Rs 1.50 per litre while the oil marketing companies (OMCs) will absorb the impact to the tune of Re one.
"The notification in this regard will be issued today (Thursday) and prices will be applicable immediately afterwards," he said.
The Centre's decision was announced after high-level consultations involving Prime Minister Narendra Modi, Bharatiya Janata Party (BJP) President Amit Shah, Finance Minister Arun Jaitley, Petroleum Minister Dharmendra Pradhan and Railway Minister Piyush Goyal.
With Assembly elections due later this year in Madhya Pradesh, Rajasthan and Chhattisgarh, where the BJP has high stakes, the decision comes a day after the Union Cabinet decided to hike minimum support price for rabi crops.
Acting quickly on the orders of the BJP President, the party-ruled governments in Maharashtra, Uttar Pradesh, Gujarat, Madhya Pradesh, Himachal Pradesh, Jharkhand, Assam, Arunachal Pradesh and Tripura announced a Rs 2.50 cut in VAT on the fuels.
While Maharashtra effected the cut only on petrol, all other states did it on both fuels. Jharkhand, which had earlier announced a cut only on diesel, later applied to petrol as well.
Reacting to the Centre's decision, the Congress described the cut as "an ant" compared to the increase which is "an elephant".
"It's a panic reaction from the government. The relief is insignificant and like a needle in haystack," party spokesperson Randeep Surjewala said daring the government to bring fuel prices to 2014 levels.
The Kerala government, which had recently reduced VAT on the fuels, said it would not cut the tax now and asked the Centre to restore prices to 2014 levels before it can consider further cuts.
Last month, the governments of Karnataka, West Bengal, Rajasthan and Andhra Pradesh had cut taxes on petrol and diesel.
Jaitley also said the revenue impact of the decision would amount to around Rs 10,500 crore for the rest of the fiscal, which amounts to "only 0.05 per cent of the fiscal deficit".
The Minister expressed confidence about meeting the fiscal deficit target despite the excise duty cut, saying increased revenue collections would absorb the impact of the cuts.
"The government's aim is to give relief to the consumer by increasing their purchasing power without impacting the fiscal deficit," he said.
Jaitley said the decision to give relief to consumers was necessitated by the uncertainty regarding the international oil prices and could be possible on account of better-than-expected revenue collections.
"The government's capacity to provide relief is only when domestic factors are strong," he said.
It is only the international factors, primarily rising prices of crude and domestic policy and other measures like the interest rate hike by the US, which have affected India, Jaitley said, adding India's domestic indicators are strong and stable.
Except the Current Account Deficit (CAD), which is directly linked to oil prices, all other data are encouraging, he said.
The Minister also maintained that Thursday's decision does not represent a re-regulation of fuel prices.
Responding to a query about state governments following suit with similar tax cuts, Jaitley said this measure would be a "a test for all state governments, especially those whose leaders have been demanding cuts while paying lip service to people".
While the Centre received a fixed revenue from excise duty on oil, states imposed ad valorem VAT in percentage terms which go up to as high as 31 per cent, the Minister said.
"Even when the prices go up, the Centre receives a fixed amount per litre, whereas the revenue of states goes up. So, it is easier for states to forego a part of the additional revenue that they receive due to price increase.
"Last time it were only the NDA-ruled states, which made the VAT reductions after the Rs 2 excise cut by the Centre last year," he said.
Transport fuel prices have continued on a daily record-breaking upward movement, with petrol inching closer to Rs 84 in Delhi and having already crossed the Rs 91 a litre-mark in Mumbai.
Brent crude oil hit $86 per barrel on Wednesday, recording its highest level in four years.