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NEW DELHI: The Centre slashed excise duty on petrol and diesel to lower pump prices as global crude surged to a four-year record after a day of hectic parleys amid crashing stocks and a rupee in apparent freefall. Apart from the excise reduction of Rs 1.5, the oil marketing companies were told to absorb a.`1relief, adding up to a cut of Rs 2.5 per litre.The excise duty cut comes before the state elections later this year and raises concerns about the fisc, but finance minister Arun Jaitley denied that the decision was political in nature and asserted that the measure won’t impact the fiscal deficit. The rupee closed at a record low of 73.58 to a dollar on Thursday while oil traded at around $86 a barrel.States will be asked to make a matching Rs 2.5 alitre cut in value-added tax (VAT) to provide a total Rs 5 per litre relief to consumers. Most BJP-ruled states — including Gujarat, UP, MP and Haryana — did so while Kerala and Karnataka said they wouldn’t follow suit.Maharashtra reduced VAT only on petrol for now. Punjab had not decided on the matter till the time of going to press.Jaitley said the move wouldn’t put the fiscal deficit under pressure as the impact would only amount to Rs 10,500 crore in the year to March. The government is well positioned to absorb this, given buoyant direct tax revenue. “The total impact of this for full fiscal is about Rs 21,000 crore,” he said.“Since it will be for half a fiscal, the impact will be Rs 10,500 crore in the current fiscal, which is only 0.05% of the fiscal deficit. I am confident we will be able to absorb this Rs 10,500 crore from increased collections… We are committed to the fiscal deficit target of 3.3% of GDP for this fiscal… We will maintain that,” Jaitley said, adding that the refiners will also be able to withstand the effects of the measure.Stocks of Indian Oil, Hindustan Petroleum and Bharat Petroleum closed 18.24%, 22.44% and 18.88% lower, respectively, on NSE after the announcement. Prime Minister Narendra Modi approved the three-pronged approach after discussions between the finance and petroleum ministries — the cut in central excise, price absorption by refiners and states lowering VAT.States, Jaitley said, had benefitted from the upside of the rise in oil prices as their duty structure is ad valorem, unlike the Centre, which has specific rates. Jaitley called the decision good economics.What people save on fuel will be directed into consumption, fueling economic activity, he said. “This is perfectly good economics because we want consumers to spend on buying other goods rather than spend only on energy,” he said.“Therefore, it is good economics also to increase purchasing power of consumers, and to do it without impacting fiscal deficit is still good economics…. And, reducing oil prices if you say is good politics, so be it.”Key states go to the polls in the next few months, ahead of next year’s general election. The move will possibly ease inflationary pressures, economists said. It came as the Reserve Bank of India’s monetary policy committee was meeting. Its review is scheduled to be announced on Friday.Jaitley said the decision had to be taken because the international oil price situation was uncertain and domestic revenue parameters were strong. Collections are robust not because of any increase in rates but because the tax base has widened.“We will try and see how the currency impact can be contained through the series of steps which we have taken or which we will take further,” the finance minister said. “Once there is some relief on either front — that is, currency or oil prices — that will be over and above this Rs 5 relief that we are proposing.”Jaitley said the country needs strong refiners to ensure its energy security. “OMCs are fully competent to deal with the situation,” he said. “Their financial position today is much stronger compared to what has been in the past where they had to charge much less. Therefore, they would be in a position to absorb this.”The minister asserted that the government was not reversing the decontrol of fuel prices. “We are not going back on deregulation because the oil companies will still continue to factor in price on a regular basis,” he said.Oil traded at around $86 per barrel on Thursday on fears OPEC and its allies may not be able to offset a supply squeeze from Iran and output decline in Venezuela. On Wednesday, prices had risen to $86.29, the highest since October 2014. He said it was up to the states to respond to the Centre’s measure.“It will be a test for all states that the state ministers who were only tweeting and were indulging in lip sympathy, what will they do now?” he said. “Last time also only BJP and NDA-led state governments reduced VAT. This time, if other state governments do not do it, then people will ask them.”When it was pointed out that upstream companies such as state-owned ONGC were benefitting from higher crude prices, Jaitley said: “They can give higher dividends.”Economists said the move would help cool inflation. “The impact of this retail inflation would be 9 basis points,” said Devendra Kumar Pant, chief economist, India Ratings and Research (Fitch Group). “A matching cut in VAT by state governments would result in retail inflation declining by 16 bps.” One basis point is one-hundredth of a percentage point.