Why Arun Jaitley's fuel price cut is bad economics

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Mumbai, for instance, saw the price of petrol cross the Rs 90/litre barrier while the cost of diesel had also breached the Rs 80/litre mark.

Jaitley said the government wanted "to provide relief to consumers as the global crude price had touched $86 per barrel, a four-year high".

However, fuel will cost Rs 5 per litre lesser with immediate in six states - Uttar Pradesh, Gujarat, Maharashtra, Chhattisgarh, Tripura and Assam - where state governments have further cut Value-Added Tax by Rs 2.50 per litre. The Centre has cut excise duties only twice in the past 22 months - once in October previous year when it cut the duty by Rs 2 a litre and now by Rs 1.50. The government is very sensitive about the spending behaviour of the common man and we did reduce excise duty in October previous year; some states even reduced taxes.

It had resisted the call for a reduction in excise duty since May when retail rates first shot up and then again from mid-August when fuel prices started moving up. After continuously being on an ascent for over three months, the fuel prices are likely to witness a dip with effect from Thursday midnight. Global crude oil prices are linked to geopolity, fluctuation in the exchange rate as well as the tax structure of respective states and the Centre.

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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. He said the Kerala government wants the Centre to remove taxes on petrol and diesel that were imposed when the BJP-led government imposed in 2014 after coming to power. Petrol prices were freed up by the former government of the Congress party in 2010.

The fuel price cut decision is only the latest in India's government efforts to cushion the blow from rising oil prices.

Bihar government also reduced petrol and diesel prices by Rs 2.52 and Rs 2.55 per litre respectively on Friday. The effective reduction would be Rs 4.06 per litre.

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. "So the impact will be Rs 10,500 crore in current fiscal which is only 0.05 per cent of fiscal deficit. India's ability to maintain the present growth rate for a decade or two is reasonably certain", he said. OMCs are fully competent to deal with the situation their financial position today is much stronger compared to what has been in the past where they had to charge much lesser.

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