STATES MAY CUT SALES TAX ON FUEL TO REDUCE PRICE

The long debated issue of a hike in fuel prices has come to an end. The government has finally announced the inevitable hike on Wednesday. Petrol prices have been hiked by 5 Rs while diesel will be dearer by 3 Rs. LPG will also cost Rs 50 more per cylinder. However, the Cabinet Committee on Political Affairs, which approved the price hike, has not announced a hike in kerosene prices.

Congress party president Sonia Gandhi has asked chief ministers in party-ruled states to also cut sales tax on petroleum products. The Maharashtra government, led by the Congress party, has already indicated a likely cut.

Nearly half of retail auto fuel prices in India comprise of duties and taxes, with sales tax, which varies in different states, ranging from 10 percent to 30 percent.

Prices eased earlier, weighed by India and Malaysia's move on Wednesday to raise retail fuel prices. They joined a growing number of Asian nations no longer able to afford big subsidies in the face of record oil prices.

India raised retail petrol and diesel fuel prices by about 10 percent and Malaysia hiked petrol prices by 41 percent. Taiwan, Sri Lanka and Indonesia reviewed their subsidies last month.

• Government raises fuel rates were based on international crude price of $135 per barrel. The previous steep hike was in September 2006.

• Government cuts 5% customs duty on crude, bringing the rate to 0% customs duties on petrol and diesel to 2.5% and ATF and naphtha for non-fertiliser use to 5 per cent.

• Excise on petrol cut by Re 1 a litre to Rs 13.45, and on diesel to Rs 3.60.

• Indian Oil, Bharat Petroleum and Hindustan Petroleum would have suffered a loss of Rs 2,45,305 crore. Hike will give them Rs 21,153 crore, government will forego Rs 22,660 crore.

• Inflation may go beyond 10% because of the impact of the hike.

We are helpless. There was no other option as the losses of the oil companies were huge, ‘he petroleum minister, Mr Murli Deora, said at a press conference while announcing the hikes. The price of kerosene, the so-called poor man’s fuel, was untouched. The Cabinet Committee on Political Affairs, which met in the morning, gave its approval. After the hike, petrol in New Delhi will cost Rs 50.56 per litre, diesel Rs 34.80 per litre and LPG Rs 344.75. The public sector oil companies will save about Rs 21,000 crores. All Opposition parties criticise hike. Left demands review, calls for agitation.

West Bengal, ruled by the central government’s communist allies, has cut sales tax on auto fuels by about 5 percent, in an effort to reduce the impact of Wednesday's fuel price increase.

West Bengal said it will incur a 5-billion-rupee loss by cutting sales tax on petrol to 20 percent from 25 percent earlier, and sales tax on diesel to 12.5 percent from 17 percent.

The benefit to consumers will range between 1.4 rupees to 2.1 rupees a litre, the government said in a statement.

Opposition-ruled Bihar has also cut sales tax on diesel by 1.64 percentage points to 18.36 percent and on petrol by 2.5 percentage points to 24.5 percent, nearly negating the fuel price hike.

Another communist-ruled state, Kerala, has also agreed in-principle to cut sales tax, but is expected to announce the change next week, a government official said.

India raised petrol and diesel prices by about 10 percent on Wednesday, its biggest increase in 12 years, as pressure of near-record high crude prices forced the government to cut back the mounting subsidy bill.

The move, which has already stirred political protests, is expected to drive inflation to a 13-year high of over 9 percent, analysts said. 

INFLATION MAY TOUCH NINE PERCENT

Energy costs account for 14.2 percent of the inflation index, and the price increase will have a cascading impact on overall prices as diesel and petrol are key inputs through the economy.

A Reuters poll of analysts found the immediate impact of the price rise would be to push the widely watched wholesale price inflation rate to a 13-year high of 9.2 percent on June 7.

The most recent data shows annual inflation hit 8.1 percent in mid-May, its highest in more than 3-½ years.

Some analysts feel that the central bank may not raise rates immediately but rely on more cash management and encourage rupee appreciation to control prices, pointing to moves last week to ease oversees borrowing rules for local companies.

"Inflation could definitely reach 9 percent by mid-June. There will be pressure on interest rates," said D.K. Joshi, principal economist at domestic ratings agency CRISIL.