Economics of Petrol Prices in India

Over the years we have seen a steep rise in the price of the Petroleum products. The phenomenon has been more so on the basis of the Global Crude Oil prices shooting up to the levels of $ 120 a barrel.  The resultant change in the price in India was from say Rs. 20 a liter to almost what we saw as Rs 72 a liter.  The prices were also supported by the depreciation in the value of Re v/s $ where we saw Re dropping from 35 for $1 to what we have seen 68 for $1.

However, in the recent times the Indian Basket for Crude oil has fallen below $30/barrel and that pegs the Per liter of crude oil at Rs. 12.80/-.  Shipment to refinery, processing to extract Petrol, Diesel, Kerosene and other products from it would vary the cost and the price of the finished product.  If we take the case of Petrol, the finished Petrol out from the Refinery costs roughly around Rs. 23.40/liter and then from there it adds up the excise, sales, VAT, and other central and state duties to vary on price from state to state.  

Media has raised this issue time and again that the falling crude prices are not reflecting in the retail prices. But we have seen some portion of reduction, not as much as we should have seen.  partly because of the current rate of $ against Re. where if we actually see the rate then from where we compare it to now, then we would find that the $ is almost double from what it was last when the crude was below $30.

The Second case that goes in for not being able to witness the reduction is cost is because the Govt. subsidy is wearing out and the oil companies now have open market policy to define rates.  To this effect though the oil ministry still govern the prices, the reduction is now decided in four parts - 

1. Oil companies covering their past loses
2. Central Govt covering the cost of infrastructure development 
3. State Govts eating a pie from the profits
4. Consumers / end users getting the benefit

So now if relook at the overall reduction, the benefit that the media says should be passed to the Consumers is actually distributed in four parts, so the consumer gets lesser benefit than expected.

On the other side, it needs to be noted that the State Govts get benefitted two ways where they get 42% of the excise duty collected by the center and on top of that they charge various taxes like State Sales Tax, Octroi tax and others.  So, the price reduction actually doesn’t have the required impact as when the oil companies reduce the cost of Petrol, the State Govts at times increase the duties and levies on the Petrol. This also marginalizes the overall benefit that the consumer should get. Classic example had been when mid last year the petrol prices were reduced, but the Delhi govt. increased the tax % to fill their treasures

So, the economics of Petrol Prices, benefits passed and the benefits surrendered have their own tale. Media needs to be more responsible to ensure that they bring in the right facts in the public forum rather than just the plain & simple cost v/s end product price comparison.  

However, the impending benefit would be visible as and when the GST regime would be implemented and we would see uniform price reduction / upward swing across the country…

GST Bill - A political milestone

GST Bill or the Goods and Services Bill is expected to be replacing the Sales Tax and VAT regime in our country, but there still seems to be a long way before it would get the node of Parliament. That all is a Political BS that needs to be detailed out but before that lets understand the basics of GST.

GST as proposed will be levied where the goods will be consumed and that would mean that the intermediary taxes that keep on adding to the cost of the product and bring in the variable price range from one state to other would be subsumed under GST.  A list of such taxes that would get abolished with the introduction of GST could be - 

1. Central Excise Tax levied on Manufacturing Unit
2. Service Tax levied on a Service Provider
3. Customs Duty levied on Imported goods
4. CST or Central Sales tax as levied on Inter-State Sales
5. Value Added Tax (VAT) levied by the States on the Goods or Services
6. CVD or Countervailing Duty and Special Additional Duty (SAD) as may be levied as compensating duties to Central Excise Tax / Service Tax

So, that would mean that from the layered tax there would be a simple tax regime with Center and State Share or so that to say.  We thus would not be paying taxes on already taxed items as we do today when the goods are sold and purchased at various layers of Wholesale and retail markets where they already pay the tax. As a consumer or end customer, we would definitely be benefitted with effective price control regime and better tax structure resulting in similar price structure of goods and services.

The Business segment would also get benefitted with the uniform structure and would be able to keep almost linear pricing models across the country.  However, the GDP would certainly NOT see the trend in immediate period of 2 years and we may see inflation setting in during that period and there may be a washout of the immediate benefits as may be expected from the GST.  It must be noted that contrary to the common assumption or expectation, the benefits of GDP would not be reaped by the current government with immediate effect (This is where the Politics come into picture).

So, now let's detail out the Political BS that I mentioned in the 1st para above and towards the end of previous para.  The current government is pushing hard to ensure that GST Bill is passed and the new tax regime is deployed with immediate effect because the benefits of GST would start showing from mid 2018 and the economy would show rising strength by the time the election in 2019 set in.  However, the opposition lead by Congress (I) certainly understand this calculation and would prefer to not to let the GST Bill pass until mid 2017. They would then look at letting the GST bill pass and getting enforced because they would then be able to showcase the weak economy, inflation and other economic factors to lure the public in their trap stating the failure of Governance.  That way when the elections in 2019 would set in, it would be easier for the Congress (I) led UPA to come back to power and then they would be in a better position to claim that the economic turnaround was caused by their economic policies. Simple math there as if the GST gets enforced in late 2017, it would only be in early 2020 the benefits would start reaping.

We the common people certainly don not understand all this big level game and we think that the political drama unfolding in the parliament is because the Crown Prince is in trouble.  No, that all is just a hogwash, the actual gameplay is to stall the proceedings in the parliament and not let the Bills like GST Bills pass in the parliament.  If every bill tabled in parliament today passes, then the benefits would be reaped by the current government, but if those bills are passed at a later stage or late in the game, the benefits would be reaped by government that would be formed in 2019.

We need to understand the political BS as being practiced by the Congress (I) and allies to stall the progress of the country and not just the work in Parliament.  GST Bill and every such bill tabled in the Parliament must pass within defined timelines else it would certainly be not the current government's failure, it would be the success of opposition to stall country's progress!!!