Shares of oil marketing companies fell after finance minister Arun Jaitley said that the government has asked the companies to absorb Re 1 cut on fuel prices. In response, the governments of Maharashtra and Gujarat have also announced a reduction in excise duties. Other BJP-ruled states are expected to follow suit.
Inflation in India, however, was 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 were strong and stable, except for current account deficit.
"The impact will be about Rs 21,000 crore for the full fiscal".
While a cut in excise duty that the central government levies will impact fiscal deficit, states like Bihar, Kerala, and Punjab are not in a position to cut sales tax (or VAT), they said.
On Thursday, petrol and diesel prices in Delhi were Rs 84 per litre (increase by Rs 0.15) & Rs 75.45 per litre (increase by Rs 0.20) while in Mumbai, they were Rs 91.34 litre (increase by Rs 0.14) & Rs 80.10 (increase by Rs 0.21), respectively.
"When the prices go up the Centre receives a fixed amount per litre, whereas the revenue of states go up".
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Since mid-August, the petrol price has risen by Rs 6.86 a litre and diesel by Rs 6.73 - the most in any six-week duration after the daily price revision was introduced in mid-June previous year.
"As you know, brent oil has crossed $86 a barrel, the higher it has been in the last four years", Mr. Jaitley said at a press conference.
Nearly half of the fuel price is made up of taxes.
Incidentally, Maharashtra charges highest sales tax/VAT on petrol at 39.12 per cent.
Speaking generally about the Indian economy, Jaitley said that the government has cut down on its borrowing this year and that oil companies have been authorised to raise money internationally with the help of oil bonds.
The cut, which comes ahead of assembly elections in five states - Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana and Mizoram, will cost the exchequer Rs 10,500 for the remaining half of this financial year.