The Politiconomics of Petrol pricing in India: an Islamic Perspective

Of the various sensitive issues that can make or break a government in India, petrol pricing
is one. As on 10 Dec 12, petrol price in India is R72.3 (Average price of Metros). If we take
Delhi as a base, it has fluctuated 30 times over the past 4 years causing an increase by
47%.1 On May 23, 2012 petrol saw its steepest hike ever- by R7.54 leading to nationwide
protests by the opposition and the general public. Protesters in the states of Andhra
Pradesh, Bihar, Odisha, Jammu and Kerala burnt effigies of Prime Minister Manmohan
Singh, set motorcycles on fire and held placards reading "Bring down petrol prices".2
Impact on Inflation
Petrol prices account for 1.09% of overall WPI (Wholesale Price Index). Implying that a
11.5% increase (due to the hike of R7.54 recently) increases the inflation by 13-15 bps.3
Inflation, as we know, reduces the purchasing power of the Rupee and effectively makes
people poorer. In a country where 77 per cent of the population spend 60-80 per cent
of their meager R600 monthly income on food (according to the report of the National
Commission for Enterprises in the Unorganised Sector), the price of petrol is out of reach of
the poorer majority who cannot afford the costs of private transport.
Impact on Transportation
There are 10 crore two wheelers and 2 crore cars, of which 60%, i.e. 1.2 crore cars run on
petrol, affecting about 11.2 crore vehicles in all.4 5 6 7 8 The population affected would be
even higher if we assume each vehicle is used by a family of four on average.
Causes
To understand the cause of the hike, let us first understand price breakup of petrol.
In any industry, the selling price of a product is determined by adding a profit margin to the
cost of production. However, the oil industry in India is unique, in that, the actual cost of
production has no bearing on the ultimate selling price. That is because the selling price of
petrol is determined by a principle called import parity pricing. According to it, the landed
cost of importing petrol at the international retail price (Singapore Spot Market in this case)
is taken as the benchmark. Landed cost comprises the average fortnightly Singapore market
price of petrol plus Ocean freight, Customs Duty, Insurance, Ocean Loss, etc. However,
India does not import petrol (except in ignorable quantities). It imports crude oil and refines
it to obtain the end products such as petrol, diesel, etc. 100 percent of the refining is done
in domestic refineries. Hence, the import parity price contains notional and imaginary costs
that the country doesnt actually incur.
The logic given for import parity pricing is, had it not been for domestic refineries, India had
to import petrol refined in other countries which would include the refining profit margins
charged by the refineries of the source country and hence the refineries of India are handed
an element of rent which is measured as a percentage of Effective Rate of Protection. In
India the ERP enjoyed by the refineries comes to about 40%! 9
Lets break the theory down in numbers.
During the year 2011-12, 24% of domestic crude oil requirement was met by indigenous
(domestic) sources.3 ONGC sells domestic crude oil at a discounted rate of 54.71$/bbl (FY

12).10 The international price of crude oil (Indian Basket) is 105.73$/bbl as on 10 Dec
12.11 Hence, the cost of crude oil used by oil refineries for producing petrol works out to
around 93.48$/bbl. Applying exchange rate of 54.46, it is R5,092/bbl. A barrel of crude oil
contains 158.98 liters.12 Hence, the crude oil component in the production cost of a liter of
petrol is roughly R32 (As per IOCL Financials it is even lesser at R30.14 for the current
year). Since the crude component constitutes around 90% of the total cost, the total
production cost including the refining and other costs comes to R35.56.13 Add to it Inland
freight of 0.65, marketing cost and margin of R1.47 and dealers commission of R1.79.14 15
That brings the price of petrol before taxes to R39.47~.
So what makes R39.47 shoot up to R72.3?
Taxes comprise Excise duty of R9.48 and state VAT which is different for each state. Lets
consider an average VAT of the Metro cities at R15~.16 Hence Taxes total up to R24.5~
The remaining R8.3~ is the OMC margin. But wait a minute, are the OMCs making profits?
What with the media hue and cry of OMCs reeling under huge under-recoveries? The
concept of under-recoveries is that if petrol is sold at a retail price lesser than the landed
cost of importing petrol as an end-product at current Singapore market rates and at current
exchange rate and customs duty, then the difference is a notional loss suffered by the OMCs
since they priced the product lower than what they could have competitively priced. So for
instance, if the landed import cost was R75, the under-recovery would be R2.7 (75 minus
72.3). Hence, the supposed under-recoveries are not real losses as we can see that the
OMCs are still making a healthy profit. In fact, with the deregulation of petrol pricing in June
2010, OMCs are free to price petrol at international import prices. Thus, effectively there are
no under-recoveries on petrol. However, the final price setting still has to go through the
government nod and hence is influenced by the respective governments. Also, other
petroleum products such as Diesel are still regulated. Hence there are under-recoveries on
such products. Again, under-recoveries do not mean losses. For the year 2011-12, IOCL
made a net profit of R3,954 crores, HPCL R911 crores and BPCL R1,311 crores.17 18 19 ONGC,
which supplies indigenous crude to the OMCs at a discounted rate also made a profit of
R25,123 crores. Ironically it is the no.1 profit making company in India!20 All the four OMCs
are also part of the only eight Indian companies on the Fortune 500 List. 21
Yet another issue in this regard is the government absorbing the under-recoveries by
providing subsidies to the extent of 2/3rd of the supposed loss. The deputy chairman of the
Planning Commission, Montek Singh Ahluwalia called for a cut in fuel subsidies as these
were increasing the fiscal deficit.22 Are the subsidies actually causing a burden on the
exchequer? Lets let the figures to do the talking. During the year 2011-12 the total fuel
subsidy was R138 thousand crores of which 40% was borne by upstream oil firms (ONGC,
OIL and GAIL).23 Hence the government effectively spent R84 thousand crores on
subsidizing fuel while the total tax collections by both central and state governments on sale
of petroleum products is R1,92,294 crores.27 If the government reduces its taxes by the
amount subsidized, they would have to give no subsidies while still raking in the same
amount of net revenues. Hence, the pointless, so-called "subsidies" is nothing but a
mechanism to fool the people in believing that the government is taxing its exchequer for
the sake of welfare of the people.
As regards the fiscal deficit, it amounts to approximately R5.22 lakh crores in the current
year. On the other hand, the tax concessions provided to the already-rich corporate sector
comes to around R5.28 lakh crores.24 Do the maths and youll conclude for yourself.
Hence, two components that almost double the price of fuel are-

Corporate profits
Taxes

Through the concept of public limited companies, the government is making profits out of
the sale of natural resources and also sharing it with private players (since the shares of
these companies are traded on the stock market, private investors can hold stake by
purchasing the shares). ONGC is the highest dividend paying company in India. Hence, the
fuel price margin is added to the price which the entire population has to bear so that few
enjoy the profits. Not just that, the margin on petrol is kept at the maximum through the
dubious import parity pricing as already discussed.
Apart from making profits by owning majority stake in these companies, the government
earns by charging exorbitant taxes on these sales which also has been addressed.
The Islamic system
Drawing parallel to the Islamic system in an Islamic state, both these major aspects which
contribute to the spike in prices, Privatization and taxes on natural resources are absent.
Privatization means certain things or properties are taken out of public ownership and are
placed under private ownership. Islam does not favour privatization of those public
properties and means of production which are of common utility and keeping of which in
private hands is harmful to the interest of the community. We can observe this through
the following verses of Quran and Ahadith
And make not over your property, which God has made a (means of) support for you, to the
weak of understanding, but feed and clothe them from it and speak kindly unto them. (Al-Quran 4:5)
Abyaz-bin-Hammal Marbi reported that the Prophet pbuh took back allotment of salt mine
from him when he found that it was for common use of all Muslims. -(Tirmizi, Ibn
Majah)
"The Muslims are partners in three things, waters, feeding pastures and fire." (Ahmad)
According to this Hadith, all energy resources, including oil and gas wells, coal mines and
electricity generation plants can never be privatized.
In the economic system of capitalism, under the guise of "freedom of ownership," it allows
the colonialist and their agents to own public resources and hence oppress the masses by
selling these resources to them at unaffordable prices.

The collector of taxes will not enter heaven" (Ahmad)

According to this Hadith, nobody is allowed to tax the people at will and the revenues for
the Khilafah's state treasury are only those ordained by Allah (swt). This denies the ruler
the oppressive "right" to impose taxation, whenever and however he likes. Taxes are only
collected according to what is divinely ordained which is taxing the amount that exceeds
the needs and not the entire amount earned by the person. Hence, the oppressive Direct
and Indirect taxes such as MAT, VAT, CST, etc are peculiar to the capitalist system and
are absent in the Khilafah (the Islamic state). The Indian state is heavily dependent on
fuel tax revenues. In fact, about 20% of total government revenue comes from tax
collections from sale of fuel.25

On the other hand, Islam has its own unique system of revenue collection. Some of the
sources are properties of Zakat, Jizya (head tax), Kharaj (land tax), export revenue on
public properties, etc. which will generate funds for looking after the people, without
oppressing them.
The Islamic state will neither impose taxes on these public properties, nor profiteer from
them. This will significantly reduce the prices of power and fuel, providing relief for the
masses and new life to the crippled industry and agricultural sector. Moreover, Islam has
mandated that the revenues generated through the export of these public properties are
placed in the Khilafah's treasuries and spent on all the citizens of the Khilafah, regardless of
their race, gender, language or religion.26 28

- Sharjeel and Ibn Ahmed

6 Rabial-Awwal 1434 al-Hijri / 18 January, 2013 CE
References:
1^http://www.mypetrolprice.com
2^http://www.hindustantimes.com/business-news/Markets/Nation-wide-protests-on-petrolpricehike-may-delay-diesel-reform/Article1-860727.aspx.
3^http://www.careratings.com/Portals/0/CareAdmin/NewsFiles/Economics/Impact%20of%20Petrol%
20Price%20Hike-05-25-2012.pdf
4^http://morth.nic.in/writereaddata/mainlinkFile/File420.pdf
5^http://profit.ndtv.com/news/corporates/article-5-facts-about-indias-growing-two-wheeler-market305607
6^http://online.wsj.com/article/SB10001424052748703791904576075222569283448.html
7^http://www.worldometers.info/cars/
8^http://centreright.in/2012/05/petrol-price-hike-the-myth-of-subsidy
9^http://www.financialexpress.com/news/the-logic-of-tradeparity-pricing/92053/0
10^http://www.ongcindia.com/Financial_Highlights/ONGC_OVL_MRPL_FY12_Result.pdf
11^http://pib.nic.in/newsite/pmreleases.aspx?mincode=20
12^http://www.mcxindia.com/SitePages/ContractSpecification.aspx?ProductCode=GASOLINE
13^http://www.pib.nic.in/newsite/erelease.aspx?relid=61190
14^http://pib.nic.in/newsite/erelease.aspx?relid=73697
15^http://ppac.org.in/writereaddata/PS_3_i_DC_MS&HSD.xls
16^http://ppac.org.in/uniquepage.asp?id_pk=9#
17^http://www.iocl.com/AboutUs/AnnualReports/Profit_loss_2012.pdf
18^http://www.hindustanpetroleum.com/Upload/En/UPdf/Profit_Loss_2011-12.pdf
19^http://www.bharatpetroleum.in/Admin/Finance/SterliteDocument/F000000114_Annual%20Report
%202011-12.pdf
20^http://articles.economictimes.indiatimes.com/2012-11-09/news/34994182_1_subsidy-burdensudhir-vasudeva-oil-production
21^http://businesstoday.intoday.in/story/indian-companies-ril-ioc-in-top-100-of-fortune-500list/1/186125.html
22^http://www.hindustantimes.com/India-news/NewDelhi/Montek-wants-fuel-subsidies-cut-furtherto-tame-inflation/Article1-938946.aspx
23^http://www.reuters.com/article/2012/05/21/india-oil-subsidy-idUSL3E8GL0CP20120521
24^http://pd.cpim.org/2012/0916_pd/09162012_1.html
25^http://www.onemint.com/2012/03/20/budget-2012-where-does-the-government-get-its-moneyfrom/
26^http://www.khilafah.com
27^http://www.business-standard.com/india/news/fm-asks-states-to-share-fuel-subsidyburdencentre/187821/on
28^The Economic System of Islam by Sheikh Taqiuddin Nabhani
~ Rough estimate