States to get windfall of Rs 22,700 cr from plunging rupee

The rupee plumbed a new life-time low of 72.73 to a dollar, falling 28 paise Tuesday on strengthening American currency as crude prices went past the $78 a barrel mark. This also pulled down the markets with the benchmark Sensex crashing by over 509 points or 1.34 per cent, to close at 37,413.13.

The rupee opened on a positive note by inching 20 paise higher at 72.25 against the US dollar amid in-creased selling by banks and exporters. “This increase in petrol and diesel prices is likely to give the states a windfall gain of around Rs 22,700 cr over and above the budget estimates for current fiscal,” SBI Research said in a note.

An increase of $1 a barrel in crude price translates to Rs 1,513 cr revenue gain on an average to all the major 19 states, the report noted. It added the largest gain will be in Maharashtra to the tune of Rs 3,389 cr followed by Gujarat at Rs 2,842 cr. Since March, petrol and diesel prices have increased by Rs 5.60 and Rs 6.31, respectively in Delhi. Petrol price has now crossed Rs 89 litre in Maharashtra, which is the highest among all the states as Maharashtra charges the highest VAT at 39.12 per cent on a litre of petrol, while Goa charges just 16.66 per cent per litre which is the lowest. 

This windfall gain may push down the states fiscal deficit by 15-20 bps, if other things remain un-changed, the report said.

“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,” the report said, adding Maharashtra, MP, Punjab, TN, Andhra Pradesh, Rajasthan and Karnataka have fiscal headroom to lower petrol prices by at least Rs 3 and Rs 2.5 on diesel.

If the states impose VAT on base price (crude, transportation cost and commission), then diesel prices can drop by as much as Rs 3.75 and Rs 5.75 for petrol. However, this will result in a revenue loss of states of around Rs 12,000 cr (net of Rs 34,627 cr loss and Rs 22,700 cr gain from oil bonanza).