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By Mayank Bhardwaj and Aditya Kalra
NEW DELHI, Oct 4 (Reuters) - India is cutting prices of gasoline and diesel by 2.50 rupees ($0.03) a litre, Finance Minister Arun Jaitley said on Thursday, the government's latest step to tackle the impact of a sharp rise in crude oil prices and a weak local currency.
The cut includes a reduction in excise duty of 1.50 rupees per litre, which will reduce government revenue by 105 billion rupees, Jaitley said. State-run refiners will also cut the price they charge by 1 rupee per litre.
Jaitley also asked state governments to cut value added tax on fuel by a further 2.50 rupees per litre.
Taxes on gasoline and diesel, which account for more than a third of retail fuel prices, are one of the biggest sources of income for the government, which is seeking to keep the country's budget deficit in check.
"It certainly has fiscal implications. If the government wishes to stick to its glidepath of fiscal consolidation, then it will have to cut its expenditures significantly," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings.
Shares in Indian Oil Corp IOC.NS , the country's biggest oil refiner, dropped 11.4 percent in reaction to the news.
The price cut is likely to result in a loss of margin of 70-72 billion Indian rupees on auto fuel sales, according to K Ravichandran, senior vice president, corporate ratings, at ratings agency ICRA (NS:ICRA) Ltd.
Among other state-run companies, shares in Hindustan Petroleum Corp HPCL.NS closed down 13.5 percent, and Bharat Petroleum Corp Ltd BPCL.NS lost 12.4 percent. The Nifty Energy Index .NIFTYENR fell 6.14 percent.
Global crude prices Clc1 hit near 4-year highs on Wednesday, and a weak rupee has added to the woes of Indians, who have been hit by record high fuel prices. India's fuel demand grew at its slowest pace in the last twelve months in August.
India stopped controlling petrol prices in 2010 and diesel prices in 2014, linking them to global crude markets in a bid to ease pressure on government finances and improve the earnings of oil refiners. But analysts said the announcement on Thursday shows there is still a heavy government hand in the industry.
"By asking the oil marketing companies to absorb the price hike, the government is giving a signal that it can interfere at anytime in a deregulated market in the larger public interest," said Gagan Dixit, a senior analyst with Elara Capital.
Rising gasoline and diesel fuel prices have been a cause of public anger, with people in parts of the country blocking trains and vandalising vehicles in protest. Minister Narendra Modi's ruling Bharatiya Janata Party is facing a tough election in three key states this year, followed by a national election which is due by May.
Asked by a reporter about the economic implications of the move, Jaitley said the decision was "good economics" as it won't impact the fiscal deficit and will allow consumers to boost spending on other goods.
Devendra Kumar Pant, chief economist at India Ratings and Research, said the move could act as a "minor comforting factor" for the central bank during its monetary policy meeting scheduled on Friday, as a fuel price cut will ease retail inflation.
The national reduction translates to a 3 percent cut in gasoline prices, and a 3.3 percent fall in diesel prices in India's capital New Delhi. Fuel prices are not uniform across the country due to variable state taxes.
Gasoline was sold at 83.85 rupees a litre, while diesel was sold at 75.25 a litre on October 3, according to state-run retailer Indian Oil Corp's IOC.NS website.
Some states such as Gujarat, Chhattisgarh, Tripura, Uttar Pradesh, Assam and Maharashtra, ruled by Modi's BJP, cut their own taxes following the federal government's announcement. But it is unclear how many of India's 29 states will meet the request, though some had in recent weeks already reduced their take.
"I hope all state governments do this, and they announce this so that consumers benefit by 5 rupees," Jaitley told reporters.
($1 = 73.5750 Indian rupees)