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Old 26th September 2011, 21:16   #1
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Default Petroleum Pricing in India ? Debate

I don t know whether the above topic is debated earlier, if so moderators are requested to move the link into appropriate thread

I have been hearing friends of mine stating that petrol is available at Rs 5 per litre in Saudi Arabia , Rs 8 in Dubai and Rs 7 in Qatar to the end consumer. These are obviously petroleum producing nations. Considering that crude is priced at $ 105 per barrel in international , assuming that overheads of refining and transportation $ 20 it would cost $ 120 per barrel, which literally translates into costing of Rs 37.73 per litre. Considering that 50% domestic production of crude the average costing of domestic fuel is much lower. The average costing would be in the range of Rs 30 per litre. Excise duty and Sales Tax is a major component of pricing at the retail level.

If one looks at the balance sheet specifically PAT ( Profit after tax ) of three majors in the Oil Industry ONGC Rs 1,89,240 crores, IOC 7455, RIL Rs 10,140 crores. The reserves of Oil PSU ( Public sector Undertaking ) and fixed bank deposits too are substantial. The PAT is for F 2010. Under the above circumstances, how do the oil companies claim that they are loosing money on selling petrol and diesel. I understand kerosene is subsidised. Coming to gas production, almost 90% production is domestically produced which is primary reason why profitablity is high for ONGC. Still the govt is cringing that they are subsidising Gas prices comparing it to International prices. If Gas prices are increased to international level ONGC profit will soar to Rs 3,60,000 crore. The FD ( Fixed deposit at Banks ) of ONGC is approximately Rs 1,40,000 crores which means a staggering interest income of Rs 14,000 crore is being credited.

Considering above facts a realistic pricing policy has to be evolved. Jet fuel is sold at Rs 40 per litre ( including excise and sales tax of 30% on an average ) where Oil companies are making a neat margin, which is sold on credit to most airlines. All other petroleum products are sold on cash and carry by Oil PSU's. The price differential or costing is not much between petrol, diesel and kerosene. Under such circumstances are we being taken for a ride by subsidy or cross subsidy terminologies dished out by economist. It is sad that uniform pricing of petroleum products too is not adopted all over India negating the tax differences. Most consumer companies have adopted uniform pricing of their products across country, why Oil PSU's are unable to do it is a moot question.

Guys i would like a debate on this intriguing subject matter. Expert opinions are welcome. I stand to be corrected in case my calculations or figures quoted are wrong.

Last edited by ukderebail : 26th September 2011 at 21:34. Reason: grammer
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Old 26th September 2011, 23:33   #2
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Default Re: Petroleum Pricing in India ? Debate

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Originally Posted by ukderebail View Post
It is sad that uniform pricing of petroleum products too is not adopted all over India negating the tax differences. Most consumer companies have adopted uniform pricing of their products across country, why Oil PSU's are unable to do it is a moot question. :
Uniform pricing can never be a reality because the State Govt. wants a share in the pie. Each state has it's own set of taxes on the petroleum products, that's why the huge difference across states.
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Old 27th September 2011, 00:07   #3
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Default Re: Petroleum Pricing in India ? Debate

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Uniform pricing can never be a reality because the State Govt. wants a share in the pie. Each state has it's own set of taxes on the petroleum products, that's why the huge difference across states.
eg. Petrol in Karnataka costs 75 bucks a litre, whereas in Pondicherry it is 65. A car of a 45 litre fuel tank costs Rs. 450 more to fill in Bangalore than it does in Pondicherry (or some other states/UTs).

Diesel, the consumer-friendlier fuel, is almost the same in all states, wonder why ?
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Old 27th September 2011, 00:08   #4
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Default Re: Petroleum Pricing in India ? Debate

At the moment there is a lot of confusion around this. Before this thread derails into the important matter of petrol prices kept high to discourage pollution and other environmental factors, lets please park the thought because probably everyone agrees with that, just not in the context of this discussion.

If we want to discourage consumption there should be a clear indicator of how much higher petrol is priced than market prices for the 'green' factor and the extra money used for some publicly agreed good.

Currently in the midst of subsidy and cross subsidy we have the ridiculous situation of the government claiming petrol is subsidized and we should be grateful, and the oil companies are making losses, while we pay one of the highest rates in the world. This is simply silly.

I won't get into purchasing power parity as oil is global commodity and we have to the fair market price which I am sure everyone is willing, the question is what is the fair market price?
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Old 27th September 2011, 07:49   #5
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Uniform pricing can never be a reality because the State Govt. wants a share in the pie. Each state has it's own set of taxes on the petroleum products, that's why the huge difference across states.
In 1993 when i was working for Kurl-on we negated the tax difference between states by adjusting the basic price accordingly. It is simple if the sales tax is zero in AP and 20% in Gujarat, AP basic prices will be pegged higher by 20%, this way sales tax differential was negated. This ensures that entire sales potential of a state gets utilised. There is no migration of sales due to sales tax difference, this could be adopted by automobile companies too, which will ensure we don t pay lifetime tax twice in case of transfers of vehicle from one state to another.

We were asked to shell out nearly 25 k for migration of vehicle from Maharastra to Karnataka for a 6 year old Maruti 800 vehicle whereas we paid 14 k in Maharastra as Life time tax in 1999. We were refused refund of tax in Maharastra. The case is on appeal RTO

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eg. Petrol in Karnataka costs 75 bucks a litre, whereas in Pondicherry it is 65. A car of a 45 litre fuel tank costs Rs. 450 more to fill in Bangalore than it does in Pondicherry (or some other states/UTs).

Diesel, the consumer-friendlier fuel, is almost the same in all states, wonder why ?
Diesel consumption is higher, therefore Pondicherry govt must have retained the same level of taxation. I would rather blame the Oil companies for not negating the tax difference by simple adjustment of basic price. Petrol price for example should be uniform at around say Rs 70 per litre and Rs 50 per litre for diesel.

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Currently in the midst of subsidy and cross subsidy we have the ridiculous situation of the government claiming petrol is subsidized and we should be grateful, and the oil companies are making losses, while we pay one of the highest rates in the world. This is simply silly.
Raul that is why i quoted the PAT ( Profit after tax ) income of Oil companies can you imagine a profit of Rs 1,89,240 crores for ONGC last year. It is phenomenal. So we should not get carried away by misleading concepts of cross subsidy. At the end of the day almost all profits are taken taken away by Govt in the form of dividends and taxes.

Correction The profit is quoted in millions it would still mean a profit Rs 18,920 crores for ONGC Reliance profitablility is pegged at 50% of the total profitability declared for F 2010

Last edited by bblost : 27th September 2011 at 10:46. Reason: Please use multi quote instead of creating separate posts. Thanks. Removed extra smiley.
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Old 27th September 2011, 10:35   #6
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Default Re: Petroleum Pricing in India ? Debate

Mods

Not sure his is the right plae to post. If you find the post un appropriate, please delete it.

The price per litre of petrol in venezuela is Rs 1.52. That means for the current price hike of around Rs 3.4 we can buy more than 2 litres of petrol.

I understand that the petrol price is subsidised there. But imagine is a govt can price it at such staggeringly low levels and still survive why cant ours?

Barath
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Old 27th September 2011, 10:50   #7
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Originally Posted by ukderebail View Post
Correction The profit is quoted in millions it would still mean a profit Rs 18,920 crores for ONGC Reliance profitablility is pegged at 50% of the total profitability declared for F 2010
I am shocked to see this figures. I quickly went to the corporate sites of ONGC and BP to check it out. Not that i don't believe you but wanted to see it with my own eyes.

Why does government always say that these companies are suffering losses???
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Old 27th September 2011, 11:03   #8
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Default Re: Petroleum Pricing in India ? Debate

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Originally Posted by ukderebail View Post
In 1993 when i was working for Kurl-on we negated the tax difference between states by adjusting the basic price accordingly. It is simple if the sales tax is zero in AP and 20% in Gujarat, AP basic prices will be pegged higher by 20%, this way sales tax differential was negated.
That might have been necessary in the case of Kurl-On, for a mattress is not something you buy every week. So people will not mind travelling a couple of hundred kms once in 5 years if the price difference is justified.
In case of fuel, it's a weekly or bi-monthly purchase and 99.5% of the consumers will not travel to the neighboring state just to refill because ST is less there.

If you take the case of karnataka everybody cribs about the higher tax on automobiles and petrol but nobody talks about the lower taxes on alcohol in Bangalore. To tide over the deficit caused by some subsidy some other commodity is taxed higher. Thats simple economics.
In Tamilnadu ST on fuel was reduced last month, and in turn this month tax on Film theatres and IPL matches was increased. In the end it's just a balancing act.

Last edited by Daewood : 27th September 2011 at 11:11.
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Old 27th September 2011, 11:11   #9
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Default Re: Petroleum Pricing in India ? Debate

Highest to lowest price difference between Indian states is Rs 15.xx Rupees. Highest being in many states including Karnataka and Lowest in Anadaman Nicobar island where petrol price is 59.XX Rupees.
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Old 27th September 2011, 11:59   #10
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Default Re: Petroleum Pricing in India ? Debate

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Originally Posted by Daewood View Post
That might have been necessary in the case of Kurl-On, for a mattress is not something you buy every week. So people will not mind travelling a couple of hundred kms once in 5 years if the price difference is justified.
In case of fuel, it's a weekly or bi-monthly purchase and 99.5% of the consumers will not travel to the neighboring state just to refill because ST is less there.

If you take the case of karnataka everybody cribs about the higher tax on automobiles and petrol but nobody talks about the lower taxes on alcohol in Bangalore. To tide over the deficit caused by some subsidy some other commodity is taxed higher. Thats simple economics.
In Tamilnadu ST on fuel was reduced last month, and in turn this month tax on Film theatres and IPL matches was increased. In the end it's just a balancing act.
Subsidizing alcohol to balance higher automobile taxes can only be a valid argument in India. No surprises really, as that's the currency votes are traded in, isn't it?

Why care about the petrol-burning citizen when it's the alcohol-guzzling idiot who votes you into power.

Balancing essential commodity prices against entertainment items is absurd. Period.
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Old 27th September 2011, 12:42   #11
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Default Re: Petroleum Pricing in India ? Debate

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Subsidizing alcohol to balance higher automobile taxes can only be a valid argument in India. No surprises really, as that's the currency votes are traded in, isn't it?

Why care about the petrol-burning citizen when it's the alcohol-guzzling idiot who votes you into power.

Balancing essential commodity prices against entertainment items is absurd. Period.
Sorry for going OT, but I do not think that alcohol is subsidized anywhere. On the contrary, the tax Govt levies on Alcohol is much higher than Petrol in all probability.
Mods: Just discussing this topic from a taxation perspective, please remove if you think it's not suitable.

Coming back to the topic, even I would like to hear some experts talk in detail on this matter. But considering that some other forms of taxes such as Income tax etc are pretty low in India, the Govt does need some mode for revenue generation, or is there more to it than meets the eye?
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Old 27th September 2011, 12:44   #12
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Default Re: Petroleum Pricing in India ? Debate

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Balancing essential commodity prices against entertainment items is absurd. Period.
When Travel/Entertainment is the biggest employment opportunity of a state it isn't absurd. If employment isn't generated how do they buy essential commodities?
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Old 27th September 2011, 15:17   #13
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Mods

I understand that the petrol price is subsidised there. But imagine is a govt can price it at such staggeringly low levels and still survive why cant ours?

Barath
I believe overall there is a huge revenue generated for the central and state governments. The amount of excise and sales taxes collected is huge. But one fundamental principal in FMCG sector is that one should have uniform pricing across India, it does not require govt intervention, it can be done at company level. A Lux soap, Amul Butter is sold at one single MRP across the country for example.

Quote:
Originally Posted by Daewood View Post
In case of fuel, it's a weekly or bi-monthly purchase and 99.5% of the consumers will not travel to the neighboring state just to refill because ST is less there.

If you take the case of karnataka everybody cribs about the higher tax on automobiles and petrol but nobody talks about the lower taxes on alcohol in Bangalore. To tide over the deficit caused by some subsidy some other commodity is taxed higher. Thats simple economics.
All FMCG goods should be sold on single MRP otherwise prices can be manipulated by dealers. Do you find Lux or Amul butter sold on differential prices across country even though individual states charge different taxes, it is uniform because the companies do their homework. Petrol too falls under FMCG category we use it daily even though we may be refilling weekly or monthly.

Liquor is no more cheaper like earlier in Karnataka. It is now getting closer to other states only thing it is freely available and well distributed. I wish the prices are to the level of Goa prices.

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Originally Posted by avisidhu View Post

Coming back to the topic, even I would like to hear some experts talk in detail on this matter. But considering that some other forms of taxes such as Income tax etc are pretty low in India, the Govt does need some mode for revenue generation, or is there more to it than meets the eye?
I believe by default because of pricing anomaly diesel vehicles have started selling more than petrol vehicle. Essentially Petrol vehicles are less polluting and therefore it should be encouraged. Since Diesel prices have been pegged lower Diesel cars sell more. I am sure all experts are aware of the pricing they would not like to point out to aam aadmi that we are being taken for a ride.

Last edited by bblost : 27th September 2011 at 15:55. Reason: Please use multi quote instead of creating separate posts. Thanks.
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Old 27th September 2011, 15:37   #14
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Default Re: Petroleum Pricing in India ? Debate

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Originally Posted by ukderebail View Post
I believe overall there is a huge revenue generated for the central and state governments. The amount of excise and sales taxes collected is huge. But one fundamental principal in FMCG sector is that one should have uniform pricing across India, it does not require govt intervention, it can be done at company level. A Lux soap, Amul Butter is sold at one single MRP across the country for example.
I do not understand the relevance of discussing uniform pricing of petrol here - From the Petroleum Company's perspective, the revenue generated/litre of petrol will be same across states regardless of what the end consumer is paying for it in each individual state.

Would be glad if someone can answer these -
Do we have any stats on how much the PAT of these companies have changed YOY from 2009 till now.

Also do we have any stats on the increase in revenue/litre of petrol made by these companies when the petrol prices soared from 40 something to the current level
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Old 27th September 2011, 16:00   #15
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Default Re: Petroleum Pricing in India ? Debate

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If one looks at the balance sheet specifically PAT ( Profit after tax ) of three majors in the Oil Industry ONGC Rs 1,89,240 crores, IOC 7455, RIL Rs 10,140 crores. .... Still the govt is cringing that they are subsidising Gas prices comparing it to International prices. If Gas prices are increased to international level ONGC profit will soar to Rs 3,60,000 crore. The FD ( Fixed deposit at Banks ) of ONGC is approximately Rs 1,40,000 crores which means a staggering interest income of Rs 14,000 crore is being credited.

Considering above facts a realistic pricing policy has to be evolved. Jet fuel is sold at Rs 40 per litre ( including excise and sales tax of 30% on an average )
Too many incorrect figures in the post.

1) ONGC Profits and Asset statement have been inflated by a FACTOR OF 10. They only have 14k Cr in bank and 18k odd crore of profits. Compared to global biggies ONGC is a small Fish

2) I don't know where you got the ATF number from. but going by IOC data it varies from 58 Rs/lit in Delhi to 65 Rs/lit in Kolkata. Aviation Turbine Fuel : Industrial Fuel : Essential Oils

If you have to blame anybody, blame the State Governments, each of whom have created an arbitrary tax structure.

To give an example Sales Tax for Diesel is 18%, Petrol - 29% in Karnataka. In TN it is closer to 8% and 14% respectively.

While I don't disagree with the notion that prices ought to be rationalized and more importantly subsidies have to be removed. Hitting at the Oil companies is not the right way. After all they are in the business to make money.

Last edited by aby : 27th September 2011 at 16:01.
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