INDIA’S PETROL PROBLEM

Commit and rollback – a pretty easy operation in a database world but not so easy in the real
world. India has taken steps to de-regularize the petrol prices and increase diesel prices. In effect
petrol and diesel prices are raised by 3 rupees and 2 rupees respectively. Kerosene was increased
by 3 rupees per liter and the Liquefied Petroleum Gas(LPG) rate is increased by 35 rupees per
cylinder. This is done by the ruling Congress party. This did not go well with the opposition
parties in all states and as with most cases in India, they are organizing a country-wide
strike. The cost of today’s strike is estimated to be 10,000 crore rupees ($2.14 billion).

Even after the hike in the four sensitive petroleum products, government of India still has to
under recover 53,000 crore rupees or $11.3 billion. At current international prices the under
recoveries of the oil marketing companies would translate to Rs.17.92 per litre on Kerosene,
Rs.261.90 per cylinder on Domestic LPG and Rs. 1.5 per liter for diesel.

When compared with India’s neighboring countries, the prices of petrol and diesel are higher but
the cost of kerosene and LPG are much lower.

The consumer price of Kerosene in India’s neighboring countries :

1. Rs.35.97/litre in Pakistan
2. Rs.29.43/litre in Bangladesh
3. Rs.21.02/litre in Sri Lanka
4. Rs.39.24/litre in Nepal.

The consumer price of LPG in India’s neighboring countries :

1. Rs.577.18/ cylinder in Pakistan

2. Rs.537.37/ cylinder in Bangladesh
3. Rs.822.65/ cylinder in Sri Lanka
4. Rs.782.84/ cylinder in Nepal (source)

Coming to petrol, in April 2010, the cost of a liter petrol in Delhi was 47.93 rupees per liter. But
as per the government of India, if it was market determined then it should be 54.61 rupees per
liter. Not sure how the figure of 54.61 was arrived at but at 47.93 per liter the actual cost of
petrol is 26.34 rupees per liter before all the taxes.

Here is the breakdown of the taxes charged by the government in various forms. From the time it
is refined to the time it reaches the consumers.

1. Excise duty : 14.35 rupees per liter

2. Customs duty : 7.5 percent
3. Sales tax or VAT : 20 percent. (PIB)
The total taxes amount to 45 percent of the final cost of the petrol. With a 26.34 rupees per
liter of petrol if we add all of the taxes it comes to 47.93 rupees per liter, the cost of petrol in
Delhi before the recent hike.

The crude in international market is now at $72.35 per barrel. If barrel is taken to be 158.99 liters
then the cost of crude would be some 46 cents which would mean the crude cost is 21 rupees.
And the cost of refining crude should be added up to. The cost of refining is hard to find out and
looking at the difference it should be around 5.34 rupees per liter of petrol. I somehow find that
hard to believe and I thought the cost of refining would be much higher. Crude goes through a lot
to become petrol. Crude Distillation Unit (CDU), Vacuum Distillation Unit(VDU), Fluid
Catalytic Cracking Unit (FCC), Hydro-cracker, Coker unit, Lube Unit are the several things
which crude goes through to become petrol or diesel.

If a barrel of crude oil in International market is $140, as it was in 2008, and if the petrol
prices were left to the market fluctuations then the cost of petrol in retail market would be 70
rupees per liter. This was exactly the rate at which Shell sold petrol in 2008. Shell is the lone
private retailer along with Reliance. Both Shell and Reliance had shut down many of their shops
as they couldn’t compete with the government owned oil marketing companies which were
absorbing the shocks. This has done two things. It kept private sector out of the competition and
it has shielded people from price hikes and falls and inherently made them oblivious to the
consumption control.

India’s oil subsidies are 0.4 percent of India’s total budget in 2008. Why go through the
convoluted path of shielding consumers from price hikes and falls, absorb that loss from the oil
marketing companies and ultimately put that back on India’s national budget which again is
coming from the tax money?

There are lot of things which I don’t understand and this petrol diesel mess is on of them. And
coming to the strike, what the opposition parties want is the rollback of petrol prices. Not one of
them are talking about the ridiculous taxes (close to 50%) on these petroleum products.
Shouldn’t they be concerned about the taxes than the price hike? And the cost of today’s strike to
nation’s economy is $2bn, who is footing that bill and who is organizing a strike for it?

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Comments

by Anonymous
 on 07/05/2010 11:10 pm

What comparisons! Pakistan, Nepal, Bangladesh!! If you HAVE to give an example, why not
give something that doesn't involve failed nations? And how dare you compare India to those
countries? Disgusting! Your article makes a case for price rise and why we should't be like
Pakistan!

by Sriram Vadlamani
on 07/05/2010 11:15 pm

I don't think you have read it right. Those comparisions are done by Government of India and not
me. Most importantly those are the right comparisions as those are the nations which share the
same kind of history.

Would you feel any better if these comparisions were done with US, UK, Japan and China? And
do you think that would be fair to India?

by Anonymous
on 07/06/2010 12:35 am

good research bhai!!! i didnt knw that this much taxes are imposed by govt. really these taxes
shud be cut down !!! and dont want to talk about so called leaders of our country, they r only
politicions!!! and they r fooling us.

by Anonymous
on 07/06/2010 01:44 pm

this is ridiculous..... why should we compare the fraud nation like Pakistan... price rise or down
totally depend on the govt.. opposition party had done bandh.. this is shameful.. opposition party
makes number and ready to full fleshed for new govt with the help of these kind of band.. al
politicians are same.. every govt looting the middle man... stop this nonsense like bandh... how to
increase the value of the middleman and how to decrease the prices.... The great economist
Manmohan Singh had did nothing for Indian people....

by Anonymous
on 07/06/2010 05:45 pm

shai

by Noushad
on 07/06/2010 07:39 pm
I didn't quite understand the excise duty part. You have mentioned it is 14.35 rs which is little
over 6%. But 6% of what ? 6% of 26.34 is not 14.35. And you have computed the total tax at
45%. Again 6%+7.5%+20% is not 45%.

by Sriram Vadlamani
on 07/06/2010 11:37 pm

14.35 is the flat fee and it is not percent of anything. That's corrected.

Once you add up the excise duty, customs duty and VAT it will constitute 45% of the final retail
price of 47.93.

by Anonymous
on 07/07/2010 03:26 pm

nation-wide bundhs like this should be made.a 10 years ago a middleman could cover an entire
week with just 500RS but now he could scarcely lead one day with it.
 INDIA’S FINANCIAL PROBLEMS
While India might be boasting about its new dollar millionaires, who grew by 50 percent in
number over 2008, it owes a lot of money to the World Bank. At the end of June, which is the
end of the fiscal year for the World Bank, India owed $9.26 billion making it the largest loan
taker from the World Bank. Mexico and South Africa occupy the next two spots. Fifteen percent
of World Bank loans are to India, 11 percent to Mexico and seven percent to South Africa.

India recently signed agreements for $4.2 billion in loans to fund India’s infrastructure projects
and recapitalize its banks. This is how they are being used:

1. $1 billion for PowerGrid Corp of India

2. $1.195 billion for India Infrastructure Finance Company
3. $2 billion to recapitalize state-run banks
4. $1 billion to clean up India’s sacred river Ganga
5. $1.05 billion to fund education sector in India
6. $100 million for India’s microfinance to be disbursed through SIDBI

From providing a billion dollar fund to clean up the Ganges to road projects in Andhra Pradesh,
the World Bank has provided money when needed. This increase in World Bank lending is an
indirect result of India's increased voting share and the World Bank’s capital base increase. A
few months back India increased its voting power to 2.91 percent, making it the seventh largest
shareholder. That increased shareholding and the World Bank’s increased capital base (about
$86 billion), would mean India will get additional funding (about $7-10 billion) in the coming
years.

Debt is the worst poverty. India’s sovereign debt is a matter of great discussion, but the tragic
debt stories of Greece and Ireland have dwarfed India’s debt worries. Still, it is a matter of
concern as nothing weighs a country or a person down like debt. Thankfully for India, its
household or consumer debt is much lower when compared with other countries. India’s other
debts which are either government or institutional are a lot higher than the household debt.
India’s overall debt is 129 percent of GDP which is a lower than China (158 percent) or
Brazil’s 142 percent, but higher than Russia’s 79 percent.

India’s government debt is 62 percent of GDP is almost equal to Brazil’s government debt. But it
is much higher than China’s 30 percent or Russia’s 5 percent.
India’s household debt is 12 percent of GDP and is the lowest in the studied countries.
Switzerland has a 118 percent household debt followed by Britain and the United States. Brazil,
China and Russia also have low household debt at less than 15 percent. One of the many reasons
why the BRIC nations weren’t affected as much by the global crisis. India’s financial debt is 10
percent of GDP and non-financial business debt is 45 percent of GDP.

Man is born free but is everywhere in debt. (source)

Debt, no matter what form it takes, is not a good thing. Not for the individuals and especially not
for the country as seen in the case of Greece and Ireland which are carrying a debt of 800
percent. How India grows for the next three years and what fiscal measures it takes to bring the
debt down remains to be seen. For individuals the advice is simple – don’t borrow. But for a
country which has to grow to feed its people, not borrowing is not an option. It has to grow
beyond borrowings. In other words, it has to invent growth.