In October 2014, five months into office, the Narendra Modi government unveiled one of its biggest reforms, lifting state controls on diesel prices and aligning these with international crude oil costs.
The bold decision was aided by a fall in global oil prices to near four-year lows, making for the first domestic diesel price cut since January 2009.
Until then, diesel prices were determined by oil marketing companies, not based on crude oil price movements, but largely based on electoral implications.
This was also aimed at helping offset the shocks when global crude oil prices shoot up.
In a related move, from June 16, 2017, petrol and diesel prices are revised daily as opposed to fortnightly earlier.
The smallest changes in international oil prices and rupee/dollar exchange rates are factored in the daily prices. It prevents price shocks for customers during periods of high crude price volatility. It also helps oil companies pass on crude price changes to customers immediately.
Market-determined diesel prices, free of administrative control, which the government announced four years ago, was aimed at cutting subsidies and help reduce taxes on petroleum products.
There is no gain saying the fact that petrol and diesel are one of the most heavily taxed products in India. For instance, about 45 percent of the price that a consumer pays for a litre of petrol at the pump go as taxes to the Centre and states.
Successive governments, both at the Centre and states, have used petroleum products as milch cows. In 2017-18, the Centre earned Rs 2.29 lakh crore from central excise duty on petroleum products, which is about 11 percent of the Centre's total gross tax revenues of Rs 19.46 lakh crore earned during the year. Of course, a part of this was shared with states as part of an agreed devolution formula.
Likewise, states earn significant revenues from taxing petroleum products. This is particularly true for the richer or the so-called industrialised states such as Karnataka and Maharashtra.
The central government had raised excise duty on petrol by Rs 11.77 a litre and that on diesel by Rs 13.47 a litre in nine instalments between November 2014 and January 2016 to shore up finances as global oil prices fell.
However, after crude oil prices starting soaring since mid-August ahead of the festive season, in October the Centre decided to cut the excise duty on petrol and diesel by Rs 2.50 per litre.
Centre bore the burden of Rs 1.50 per litre while oil marketing companies (OMCs) absorbed another Re 1 in cost, bringing the total benefit to consumers to Rs 2.50.
Simultaneously, many state governments reduced their state VAT on petrol and diesel by Rs 2.50 a litre, bringing a relief by as much as Rs 5 per litre to consumers.
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