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Old 7th June 2010, 22:33   #1
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Default Macroeconomic viewpoint Vs Microeconomic viewpoint - A story of fuel prices in India.

Today the moment the news came that there was not gonna be any increase in the fuel prices across the country, all my colleagues were almost in a celebratory mood.
In fact I was in a mood of shock on seeing so many educated ones get so excited (I mean to an extent its ok but their level of excitement put me off)

I forgave them for being BE grads as they did not make any difference between macro economic and micro economic trends. But I thought atleast people on this forum ought to know the difference. So here is a small economic report.

In a country like India, there are many who get angry when they get to know govt increased the price by a Rupee. But not sure how many know, today govt bears Rs 2000 Crore every day just because of not increasing the prices.

As like my colleagues most people generally tend to see the effect on their pocket they see increase in two rupees means increase in Rs 4 per day for commute. But they fail to realize how much amount of tax payers money is getting wasted just because we want the petrol cheap. All the fuel is not as cost price it is at subsidized price. I get more irritated when people use the home LPG for the car and as water heater fuel. For heaven's sake dont think you are cheating govt you are cheating yourself.


Imagine, if government has Rs 2000 cr more to it kitty per day, and if a responsible person is to take care of it what all good use it can be put to. Such huge grade separators in big cities cost just Rs 300 crore, government can afford to build one everyday. Moreover, if such amount is diverted to the cause of education, with good minded efforts, quality of education can improve so much. Or even if they are put into highways all SH will be looking like the GQ now.

But ultimately we all tend to see how much goes out of our pocket than seeing how much government is bearing in the backend. Dont forget even the Rs 2000 cr per day that government pays to these fuel companies is eventually out of our pockets (I mean taxes).

Thus next time we see a price increase request you to see this in a macroeconomic way than a microeconomic way. Remember the market determined pricing of fuel (like the case of US and many developed nations) is inevitable. All Indian govts till date dont want to bite the red pill for the fear of loosing votes. But the sooner we move to it the better, else more and more developmental efforts will be stalled for want to cheap petrol.

Last edited by xingamazon : 7th June 2010 at 22:38.
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Old 7th June 2010, 22:51   #2
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There is another way to look at this.

Lets take for example the government does away with fuel subsidy.It would then mean huge amounts of money that is now being doled out by the government to oil companies is saved.That reduces our Fiscal deficit,and also allows the government to deploy that money for other subsidies like fertilizer,PDS,minimum wage work and crop procurement.

BUT,increasing fuel prices has its disadvantages.The obvious one is the amount of money flowing out of the consumers pocket.This would mean that the money a consumer would use to buy things is used up in fuel.Indian economy primarily runs on massive domestic demand,unlike the chinese which is export oriented.
This would affect GDP growth.

Another fallout of such a measure is inflation would remain high because high pump prices would directly cause increase in prices of basic commodities.
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Old 7th June 2010, 23:09   #3
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When Mayawati wastes 22.5crores on a garland, what economy do we call that?

Mayawati's garland worth Rs 22.5 crore, says Congress

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Old 7th June 2010, 23:34   #4
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Quote:
Originally Posted by xingamazon View Post
But ultimately we all tend to see how much goes out of our pocket than seeing how much government is bearing in the backend. Dont forget even the Rs 2000 cr per day that government pays to these fuel companies is eventually out of our pockets (I mean taxes).
Not sure if I really agree with this view. If you see, the indirect taxes levied on fuel are what cause it to be so high in the first place (if you compare it to US and many countries) and not the cost of production. What is happening in effect is that this is just a left-pocket right-pocket between the finance ministry and the petroleum ministry. The government (both center and state) charges huge indirect taxes on fuel, then PSU companies have to sell them at predetermined prices and are compensated by under-recoveries through the oil pool. This is absolutely ridiculous because private oil companies like RIL, Essar and Shell have to sell products at a loss or export them (I know this for a fact because I worked for one of these companies in their finance dept).

The biggest drain from the center as far as petroleum products are concerned is subsidies in kerosene and lpg. The government should gradually price these at market prices, especially lpg cooking cylinders (kerosene increase could be more gradual though). The PDS system in India is a complete failure and even today huge black-marketing exists, and it's only the crooked middlemen who stand to gain while honest people (both poor and middle-class) stand to lose.
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Old 8th June 2010, 01:25   #5
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This is the Kirit Parekh committee report:

http://petroleum.nic.in/reportprice.pdf

From what I have read elsewhere:

The actual factory gate price of Petrol and Diesel are approx Rs 22 and Rs 23 resp. This is the approx amount the oil company gets per liter sold. These rates are at the crude oil being in the $60-$70 per barrel range. If the price of barrel goes above $70, then the oil companies still have to sell at Rs 22/23, and the government provides the difference in terms of bonds (under-recoveries?).

Petrol is taxed heavily. The average Rs 48/liter consists of approx Rs 26 as tax. You are paying more than 50% of your petrol rate as central tax (13.50/liter) and state tax (the rest).

Diesel price also is more than the factory gate price - the Rs 36/liter consists of approx Rs 13 as tax where central tax is about Rs 3.50/liter and the rest is state tax.

These are taxed so as to subsidize Kerosene and LPG.

So the petrol user pays Rs 12/liter more as taxes than the diesel user, although diesel costs approx Rs 1/liter more to manufacture than petrol. This was the reason, the Parikh committee suggested a tax of Rs 80,000 per diesel car sold, to offset this difference (see pdf to know how they arrived at that figure)

My personal opinion is to do away with subsidy to kerosene and LPG totally, and pay the actual subsidy in cash monthly to BPL families. If you read the report, you will see that largest LPG consumers are the urban middle and rich, who can afford the increase in price. The largest users of kerosene are in no-electricity villages, used for lighting purpose. The amount of kerosene used per month by a BPL family is less than 5 liters. At actual non-subsidized rates, this will be approx Rs.100/month, which can be given in cash directly to the BPL families. Getting kerosene up to diesel price will stop adulteration and pilferage.
Attached Files
File Type: pdf kirit-parikh-reportprice.pdf (1.01 MB, 522 views)

Last edited by echo77 : 8th June 2010 at 01:33.
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Old 8th June 2010, 02:35   #6
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The whole fiasco is one where the Govt. charges high taxes and then subsidizes the cost thereby showing a deficit and fooling the public by slowly raising the prices.
Why can we not pay MRP + VAT like we do for everything else? ie. 22 + 12.5% = 24.75/-. Is Fuel a cash cow to be milked eternally? The whole exercise is counter prooductive and prevents free market growth.
The Govt. has a corner on fuel.
Raising fuel prices raises transportation costs and thus increases cost of everything. A 1 Re increase in fuel cost would raise your cost of living by about 1-5%. Everyone from your kabadiwallah will raise his price.
The excitement of your pals was probably due to this.
Please check out how much profit the govt. makes per day on fuel while posting a spurious loss of Rs.2000 Crore everyday.
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Old 8th June 2010, 10:21   #7
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I do agree it is the taxes which makes the petrol costly, but reducing the taxes again would go against the taxation dharma of Indian Government (not that I completely agree to this) which is to tax goods considered as luxury than those which are used by common man.

Petrol being used by mostly those who own a vehicle (which is population way above the BPL) thus its normally gets the taxation bill. This being the case not sure if reducing these taxes would benefit a aam admi (let me confess I am not talking about deisel here).

Quote:
The biggest drain from the center as far as petroleum products are concerned is subsidies in kerosene and lpg. The government should gradually price these at market prices, especially lpg cooking cylinders
I completely agree LPG is heavily subsidized and will surely need to be increased to an acceptable level.

The question is what would happen if govt stops giving these subsidies to the govt companies and reduces the taxes to all the operating oil companies. Do you think that would solve the problem..
Keep the viewpoints flowing.
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Old 8th June 2010, 10:38   #8
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My ignorance filled question is. Why cant the government modulate the tax component based on market prices so that the customer pays something within a pre determined price band?

Certainly all those huge amount of taxes that are being paid by the customer (in different heads) while purchasing a car is not going into infrastructure for running these cars. Let them use a part of it for this purpose.

Last edited by gemithomas : 8th June 2010 at 10:41.
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Old 8th June 2010, 10:45   #9
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I have made posts regarding my obeservations on the same topic long time back in some teambhp thread. Since, this issue is too complex to put my views in few lines in few minutes, I will be posting my detailed views later.

But at the same time, one quick thought I would like to share.
It is that the fuel price is high is a good thing in a different way. It will reduce the unwise use of fuels, and in a way reduce the consumption. If you see how the worlds largest consumer the USA has taken it for granted and used fuels excessively, you will understand the point. Oil prices are only going to go up in long term, though it will fluctuate to low points in medium term. Though we are not very much ahead in alternate energies what exist now is to en extent atleast because of high fuel prices. Not to mention the high FE cars. Even many of non-enthusiasts will prefer a large engined car(if not a large car) if the price was just rs.20 for petrol. And how many would go for a diesel(which is more efficient engine) if the diesel price is not artificially reduced in comparison to petrol. I would not.
Ofcourse, this is not something the govt intended, but this could be good in some ways.

Like to know about your point of view regarding this too.

Last edited by mxx : 8th June 2010 at 11:01.
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Old 8th June 2010, 10:50   #10
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Quote:
Originally Posted by gemithomas View Post
My ignorance filled question is. Why cant the government modulate the tax component based on market prices so that the customer pays something within a pre determined price band?

Certainly all those huge amount of taxes that are being paid by the customer (in different heads) while purchasing a car is not going into infrastructure for running these cars. Let them use a part of it for this purpose.
There are many reaons, one main reason I see this is because the taxes are part of what government considers as revenue.

When one makes a revenue planning one cant make it a variable amount. Moreover to increase/ reduce the taxes on fuel is not simple task. There is lot of red tapism approval and the seller related chagnes that one has to go thro in case this has to be put in place.
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Old 8th June 2010, 10:52   #11
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Beg to differ with xingamazon. The aam admi is the one whom petrol prices affects. He is the one living in suburbs and travelling 20-30 km to work by a juthaka scooter or moped. He is the one unconnected by bus or metro. He is the one who travels to get fertilizer and seeds from the co-op society.
The so called upper class with cars is slowly shifting to cycle to work. We're connected by intra and inter city volvo bus. We have metro.
Petrol is not a Luxury but a necessity.
A/c, Plasma Tv, Premium cars, etc are luxury and come with a 12.5% VAT. They do not have sufficient volume to bring in huge tax. Commodities like petrol, diesel, cereals, etc. which are necessities are the ones facing unrealistic tax.
The reason the govt. hesitates to raise diesel prices is because of all the govt. owned busses and locomotives. It the transportation corporations and railways were private like in the US, diesel would retail around Rs.100/L.
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Old 8th June 2010, 11:10   #12
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Xingamazon - correct view point.

I totally agree with this.

All Tax payer are the only ones who actually pay for the subsidee.

Pricing the Item (in this case Fuel) correctly - especially for Vehicle fuel where socioeconomic reasons are not valid ensures that Tax evaders do not benifit from subsidies paid for from the pockets of the few tax payers in the country.

Yes cost do go up in the short run, but in the longer run the government can go to a lower tax rate and reverse the impact on tax payers - while adversely effecting those evading taxes.

Would have like the government to atleast dergularize Petrol first and then take the bitter pill for deiseel.

Yes Taxi and Auto rates would have gone up - but that is OK. The government can continue to subsidise private operations like Trains and Public busses, as well as LPG used in homes - as these are used by the masses and not by the rich who evade taxes.
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Old 8th June 2010, 13:41   #13
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Quote:
Originally Posted by wildsdi5530 View Post
Petrol is not a Luxury but a necessity.
A/c, Plasma Tv, Premium cars, etc are luxury and come with a 12.5% VAT. They do not have sufficient volume to bring in huge tax. Commodities like petrol, diesel, cereals, etc. which are necessities are the ones facing unrealistic tax.
The reason the govt. hesitates to raise diesel prices is because of all the govt. owned busses and locomotives.
Good viewpoints there..
Agreed petrol is not a luxury but the taxation rules dont seem to agree with that. Petrol is still one of the items that is taxed a lot.

Moreover, the countries like US and China are able to bring down the prices to an extent cos they also produce them. They dont import as much as we do.

One thing is unavoidable, the fuel prices will surely be let by govt to free fall. Its not long time left that the govt will realize they are burning thier fingers a lot and will surely let go of the price control.

But when will this happen is the question. The sooner it is the better it will be for our Fiscal and economic stability.

MODS not sure if we should have this section in Indian car scene or shifting gears. Do the needful if required.
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Old 8th June 2010, 13:54   #14
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Hey guys, this thread made for some interesting reading and gave me a good insight on the way the petroleum ministry/industry functions.

The only question on my mind is, if the oil prices were to be exempted from the control of the Govt and let to be determined by the price of crude in the international market, will it be beneficial for the average consumer and the Govt?

If yes, will it be possible to implement it?
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Old 8th June 2010, 14:05   #15
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Quote:
Originally Posted by Grafin View Post

The only question on my mind is, if the oil prices were to be exempted from the control of the Govt and let to be determined by the price of crude in the international market, will it be beneficial for the average consumer and the Govt?

If yes, will it be possible to implement it?
Yes, letting the price free fall is possible, as has been practiced by many advanced markets.

Regarding question that will that be beneficial to average consumer. Thats a tricky question we are trying to address in the thread.
In short run he would be affected for having to shell out more money for the fuel bill.
But in a long run the govt defict would reduce by huge margin and they will have to an extent surplus money which they can direct to more meaningful expenditure.
Somoething like petroleum exploration itself.
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