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With crude oil prices on an upward trend, it appears petrol and diesel prices are set to go up unless the Centre changes its tax policy. So far the Union government has indicated it has no intention of doing that.


To provide relief to its residents, the Andhra government has provided a tax relief of Rs 2 per litre. Rajasthan government has provided a relief of Rs 2.5. West Bengal government has chipped in with Rs1. There have been calls that Tamil Nadu government should provide similar relief.

Two experts have expressed two different views on this. K R Shanmugam, professor at Madras School of Economics who tracks public finances in the state, says that the Centre is saying that it is trying to pay for the debt acquired by the UPA government in keeping petrol prices low even as international prices were at $100 a barrel. He adds that in general state governments can reduce excise duty to reduce the prices.

 Tamil Nadu, having piled up revenue and fiscal deficits – revenue deficit has crossed Rs 17,000 crore — has little leeway in reducing tax revenue and it is mandated by central legislation to keep deficits under limits, says Shanmugam.

And the 7th Pay Commission recommendations have already taken a toll on public finances by bringing in hefty pay hikes for government staff. “The government has to serve public good. But after GST, TN government has only petrol, diesel and liquor to raise revenue. Since liquor price was increased recently, any further increase would bring down sales. The only option for the state government is to cut subsidies and stop giving relief and aid including to other states or go for World Bank loan,” he says.

The centre can perhaps consider mopping up revenue from aircraft fuel by varying its prices as per requirement and market conditions since it seems unwilling to let go of the UPA policy of benchmarking all domestic oil prices with international rates, he said.

Meanwhile R Srinivasan, professor of econometrics and reader of Madras University, said there is a case to reduce petrol and diesel prices within Tamil Nadu. He says the state borders three other states and its main ports serve neighbouring states to a significant degree. This means truckers will have an incentive to fill their tanks in Tamil Nadu if the prices are low, and this would help offset revenue loss from tax reduction by boosting demand.

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