Why Arun Jaitley's fuel price cut is bad economics

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Why Arun Jaitley's fuel price cut is bad economics

Auto fuel prices in these states are expected to go down by Rs 5 per litre.

After months of rising fuel prices with record high petrol and diesel prices in major Indian cities, the Indian government has finally intervened, cutting petrol and diesel prices by ₹2.50 ($.034) a litre in several states across India.

So much for good governance?

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

Over two-thirds of 61 economists said in a Reuters poll the RBI would lift the repo rate at least once by the end of 2018, with over half stating that there would be a 25 basis points rise in October. The way oil prices have been going up, there has been some adverse impact on the CAD. The effective reduction would be Rs 4.06 per litre.

"By asking the oil marketing companies to absorb the price hike, the government is giving a signal that it can interfere at anytime in a deregulated market in the larger public interest", said Gagan Dixit, a senior analyst with Elara Capital.

Jaitley said the move followed Brent crude oil touching four-year high of Dollars 86 a barrel Wednesday and interest rates in USA reaching seven-year high.

Maharashtra, Gujarat and the other BJP ruled states were quick to hear him. But with a weakening rupee, it will likely have fewer options in the form of import-related tax cuts.

Finance Minister Arun Jaitley today laid down a three-point plan to bring petrol and diesel prices under control. This means that petrol will continue to be expensive in Delhi.

Finance Minister Arun Jaitley, who made the announcement, pegged the excise duty cut impact at Rs 10,500 crore.

The minister also said he was confident of meeting the fiscal deficit target of 3.3% for the current fiscal year as direct tax collections had been strong. Any further revenue loss, however, could widen the fiscal deficit.

On OMCs absorbing Re 1, he said they would adjust it over present and future prices.

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