These states can cut petrol, diesel prices by Rs 3.20 and Rs 2.30; here is how

Who is smiling the most in the wake of rising petrol and diesel prices? Certainly not the people. The biggest gainers from increasing fuel prices are states. A SBI research report today said that the increase in petrol and diesel prices is likely to give states a windfall gain of around Rs 22,700 crore over and above the budget estimates for current fiscal. 

Petrol and diesel prices have gone up by Rs 5.6 and Rs 6.31 since March this year. The international crude price has also increased in recent months while the rupee has fallen considerably against the US dollar. 

A $1/barrel increase in oil prices translates on an average Rs 1513 crore revenue gain for all 19 major states of the country, says the research report. 

The SBI Ecowrap report says, "This windfall gain will have positive impact on State finances, which might push down the states fiscal deficit by 15-20 bps, other things remaining unchanged."

SBI researchers say that time is ripe for states to lower fuel prices without compromising their fiscal balance. 

"We also estimate that since the states are having an incremental revenue over the budgeted one, they could cut on an average petrol prices by Rs 3.20 /litre and diesel by Rs 2.30/ litre, without affecting their revenue arithmetic, States like Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu, Andhra Pradesh, Rajasthan and Karnataka have the privilege to cut petrol prices by at least Rs 3 from their existing rates and Rs 2.5 on diesel,"the SBI report said while welcoming the decision of Rajasthan and Andhra Pradesh to reduce fuel prices. 

The report further suggested another way in which states can help lower prices. "Interestingly, if the states impose VAT on base price (crude oil+transportation cost+ commission), then diesel prices could drop by as much as Rs 3.75 and Rs 5.75 for petrol." However, this will cause a revenue loss of states of around Rs 12,000 crore (net of Rs 34,627 crore loss and Rs 22,700 crore gain from oil bonanza). 

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What Centre should do?

The SBI research has advised the Centre to not come up with knee-jerk reactions and ride out the recent volatility. Citing the example of Indonesia,  whose rating was upgraded in April 2018 prior to the currency woes, the SBI report says, "India's macro fundamentals are much strong and given India’s exemplary fiscal commitment even in an election year, it deserves a rating pat from international agencies, if Indonesia is the benchmark!"