Economic Times: Govt may end fuel subsidies by July!

[SLK]

Original source: Govt may end fuel subsidies as reform push begins- Policy-Economy-News-The Economic Times

Originally Posted by Economic Times - (Relevant Extracts)

NEW DELHI: The government said it may eliminate diesel and gasoline subsidies as soon as July, quicker than expected, ending a policy that had crushed state refiners' profits, strained government finances and inflated oil demand.

The move, which one state oil executive said would trigger a 5 percent rise in prices if made today to match $65 crude oil, is one of many important reforms expected from the government, and suggests it is ready to take difficult but important steps in order to balance growth with fiscal prudence.

Pricing freedom would increase tax revenue and remove massive subsidies bills, helping offset the cost of economic stimulus measures that have stretched public finances and widened the fiscal deficit to 6.1 percent of GDP in 2008/09 (April/March).

But it could hurt industry accustomed to below-market prices, raising input costs at a tough time. India's economy grew 6.7 percent in 2008/09, a six-year low, and economists say it is set for a recovery from the second half of this fiscal year.

Oil prices rose above $65 a barrel on Friday, taking gains to 27 percent in May, the biggest one-month gain in a decade, and analysts say the market seemed focused on the bullish sentiment and brighter macroeconomic outlook.

But because India barely cut prices during crude's long decline, current petrol prices would only rise by about 5 percent if the government ended controls on pricing, a senior Indian Oil Corp official told Reuters.

Eliminating subsidies would also open a domestic opportunity for private sector firms Reliance Industries and Essar Oil to shut down their petrol stations, struggling as customers bought cheaper fuel from subsidised state rivals.

Market-driven prices would help curb fuel use in India, one of the only major consumers expected to see positive demand growth this year.

India's oil product consumption, a proxy for demand, has risen about 47 percent in last decade to 133.44 million tonnes in 2008-09. India's largest oil retailer, Indian Oil Corp, sees diesel demand rising 4-5 pct, petrol demand up 8-9 pct and overall demand rising 3-4 pct this fiscal year.

I hate such articles, which just see one side of the coin. They don't seem to see the indirect taxes the government is charging on the fuel.

I do not have numbers to support this, but I'am sure the amount of subsidy they give is much less than the indirect taxes they collect from oil.

And then they claim to be running a deficit because of fuel prices?

[goldsun]

This could also lead to Diesel pricing to be either on par or higher than Petrol. I think the subsidy on Diesel is higher than that in case of Petrol.

[sgiitk]

@goldsun: I think the taxation on diesel is lower. They must do away with subsidies on LPG and (most important) Kerosene or as Lalu calls it 'Mati ka tel'. Maybe then we can expect less pollution on the road, and far higher diesel sales!

[neel385]

Well! This had to happen one day! But then, if we were to see open pricing of oil, maybe it will be win some loose some,as when oil prices fall.
A level playing field for private players might also bring in positive changes for the consumers!

[budmaash]

Originally Posted by SLK

I hate such articles, which just see one side of the coin. They don't seem to see the indirect taxes the government is charging on the fuel.

I do not have numbers to support this, but I'am sure the amount of subsidy they give is much less than the indirect taxes they collect from oil.

And then they claim to be running a deficit because of fuel prices?

I think around 40-50% of the price of Petrol & Diesel are Taxes and duties alone. Read in Newspaper sometime back that from the 45 Rs. we pay for Petrol, around 20 are collected as Taxes & Duties by various governments.

[Max]

WikiAnswers - What products do you get out of a barrel of crude oil

Every 42-US-gallon barrel of crude provides a little more than 44 gallons of petroleum products. This is gained due to processing of crude. From one barrel we get (in gallons):

* 7.27 gallons (27.5 liters): Other products (feedstocks for petrochemical plants, asphalt, bitumen, tar, etc.)
* 1.72 gallons (6.5 liters): Liquefied Petroleum Gases (LPG)
* 3.82 gallons (14.5 liters): Jet Fuel
* 1.76 gallons (6.6 liters): Heavy Fuel Oil (Residual)
* 1.75 gallons (6.6 liters): Other Distillates (Heating Oil)
* 9.21 gallons (35 liters): Diesel
* 19.15 gallons (72.5 liters): Gasoline

so from rs.3120 ($65 / barrel x rs.48 average) they make
72.5 liters gasoline (petrol) x Rs.44 = 3190
35 liters diesel x rs.33 = 1155
6.6 heating oil x rs.100 ? = 660
6.6 liters reseduo x rs.100? = 660
14.5 jet fuel x rs.100? = 1450
6.5 lpg x 25 = 162.5
27.5 liters other products x 50? = 1375

total income = approx rs.8652.5
total cost = approx 3120
= 278% profit / tax?

WOW. huge profit! so we are paying nearly 3 times for petrol?

[spadival]

And there is the small matter of actually building an oil refinery, which isn't factored into your equation. Who pays for the time and huge capital investment?

Btw, I have a disclosure to make: my share portfolio is filled with refinery stock. So my views may be biased

Mods note: Please do not use full quote. Use specific lines from quote if you want to highlight.

[aaggoswami]

Originally Posted by Max

WikiAnswers - What products do you get out of a barrel of crude oil

Total income = approx rs.8652.5
total cost = approx 3120
= 278% profit / tax?

WOW. huge profit! so we are paying nearly 3 times for petrol?

Yes, we are paying a lot for fuel. And this ultimately increases our cost of living also.
We even pay more for car and a good percentage of what we spend to buy cars goes to government.

Yes, there is some capital cost involved, but then dont we pay income tax that is also quite high ? And then we pay more for fuel.

Rather than working on lifting subsidy, they should first concentrate on quality of fuel sold all over the country.

Diesel is heavily subsidized. Once this is lifted, the overall cost of living will again go up. We first need better quality of fuel and infrastructure, then quality fuel at not so high cost.

[arin_12]

We pay more Tax than actual cost.
+1 Stop giving subsidy. And ask GOVT babu to use the petrol cost from their own money.
Many GOVT people using GAS guzzling SUV.

[pedrolourenco]

It's good to have no subsidies on Diesel. Soon the price difference between petrol and diesel cars will reduce too.