On June 25th, 2010, Indian government took a decision to deregulate the price of petrol and announced that the pricing of petrol at the refinery gate and the retail level will be market-determined1 . The decision was necessary because Oil Marketing Agencies of India were suffering a huge burden of losses of around Rs.22, 000 Crore. As a result of this political decision, a sharp increase in prices of petrol was seen which created frenzy in middle class consumers of petrol. Many economists and supporters of right political spectrum applauded this decision and considered it as a great step towards economic freedom and free market.
However, the whole concept of deregulation of petrol price was a big sham and this is the reason why irrespective of the significant increase in the prices of petrol, Indian Oil Corporation registered the record loss of Rs 22,451 crore in Q1 of 20122 . Hindustan Petroleum (HPCL) registered a net loss of Rs 9,428 crore in the same quarter. So what went wrong with the fuel retail industry and why couldn’t they gain or reduce their margin of loss while the consumers are paying exorbitant prices of petrol?
Is the Price of Petrol Market Determined?
Many people wonder about the decrease in international prices of petrol and ask why the petrol prices in India are still going up? If prices are being determined by the market, then there should be a decrease in petrol prices in India. However, this doesn’t happen because petrol price in India is determined by Indian market and not the international market. The reduction of international petrol price plays as an important factor, yet, it is not the sole player. Indian petroleum market is still a game of subsidies and taxation and governmental interventions and hence, whole episode of deregulation of petrol and diesel prices is just a sham. The record loss of IOC and HPCL is because of the delay in cash subsidy payment by the government.
Obviously, government hasn’t yet decided to deregulate petrol or diesel by removing all subsidies and taxes over petrol and diesel. However, government has agreed for keeping the prices of kerosene and LPG artificially low and to keep the prices of petrol and diesel artificially high.
Subsidies for Petroleum Industry
Indian downstream oil companies like IOC, HPCL, and BPCL were promised a total subsidy of RS 1.38 trillion INR for the year 2011-2012. 40 percent of this subsidy was given by the upstream oil companies of India such as ONGC, GAIL, and Oil India3 . On the other hand, GOI offered cash subsidy of remaining 60% of total subsidy for downstream oil companies. The upstream companies are responsible for exploring, extracting and refining petroleum products while the downstream companies are responsible for distributing, selling, retailing petroleum products in India. Both upstream and downstream oil companies of India are state run and these are controlled by Indian government. So, the 40% grant or discount or subsidy offered by upstream companies (ONGC, GAIL and Oil India) and the 60% subsidy given by GOI to downstream companies (IOC, HPCL, BPCL) is actually nothing a but a cash exchange from one state-run enterprise to other state-run enterprise.
However, the money for this exchange is collected through taxation and through selling of petroleum products.
The total tax revenue of Indian government for 2012-2013 was estimated to be Rs7.71 trillion4 . Thus, the subsidies offered for petroleum industry is 18% of total tax revenue. Obviously, petroleum industry is still engrossing huge portion of our taxes in form of subsidies. However, government is also earning a good sum of money through taxes on petrol.
The government takes Rs14.45 per liter of petrol sale as excise duty. This excise duty is independent of the market price of petrol. That is, no matter what is the actual market price of petrol; the government will take Rs14.45 from you for buying a liter of petrol. The central government of India also takes import duty of 2.5% that is levied on crude oil imported from other countries (ONGC and other Oil extracting and refining companies of India provide around 33% of total consumption). In addition, the state governments take VAT or sales tax of around 15% to 33% of market price of petrol.
Effect of petrol taxes on your pocket
The total taxes on a liter of petrol accrues to around 43% of what you pay for buying a liter of petrol; on the other hand, the actual cost of petrol in India is just 57% of what you pay. That is, if you are buying petrol at Rs80/liter price, you are offering Rs34.40 as taxes to the government while the market price of petrol is Rs45.60. That is, if the petrol prices are completely deregulated (with no subsidies and no taxes), an Indian citizen will be attaining petrol at a price of Rs45.60 per liter. Furthermore, the price of petrol is also higher because the upstream and downstream oil companies of India push prices higher to compensate for the loss caused by the enforced lower artificial retail prices of kerosene, diesel, and LPG in India. Yashwant Sinha, former finance minister of India claimed, “You can still get petrol at Rs 23.37 a liter as rest are the taxes that make it Rs 68.65 a liter in Delhi and still more elsewhere.”
General View of Indian Economy
This should be noted that taxation is a strong way of regulating the price of any commodity. As for example, Indian government hopes to regulate the price of tobacco through taxation with a motive to force tobacco consumers to give up their tobacco addiction5 . Environmentalists may feel happy about Indian government’s policy of regulating petrol prices as it is exactly similar to the policy of regulating and controlling prices and consumption of tobacco. However, it should be noted that raising taxes or increasing prices of a commodity hardly reduce the demand of that commodity while it certainly affects the production of that commodity as it hurts the producers6 . Thus, the actual burden of all this haphazard of petroleum industry will be faced by upstream oil companies of India (ONGC, GAIL, and Indian Oil) and they will find it difficult to increase the exploration and extraction of petroleum.
The taxes are the income of government which it largely spends in paying back the interest on national debt, and then on defense and other social welfare programs and subsidies. However, national debt, social welfare expenditures, subsidies, and defense expenses of India are so high that despite of huge amount of estimated tax revenues (7.71 trillion) for budget session 2012-2013, the estimated revenue deficit for 2012-13 is around Rs 3.4 trillion. This is because the estimated revenue spending of government for the budget session 2012-2013 is Rs 12.8 trillion. That is, Indian government will borrow about 44% of its total expenditure for the year 2012-13 and this debt will be burdened on the Indian tax-payers again who will have to pay it back. Indian government is continuously suffering huge fiscal deficits and it is pushing us common citizens under huge national debt which will be difficult to pay back and all this deficit is often caused due to senseless social welfare schemes like education for all, free healthcare for all, free mobiles for people living below poverty line, and many more. In addition, prime minister of India Mr. Manmohan Singh considers it right to offer $10 Billion as economic stimulus for Eurozone. The situation is certainly grim and it won’t take too much time for India to face similar economic troubles that have caused havoc in Greece.
- Petrol Price Deregulated, Press Information Bureau, Government of India [↩]
- Indian Oil Corporation posts record loss of Rs 22,451 crore in Q1, Times of India [↩]
- India upstream oil firms pay 40% of fuel subsidy, Reuters [↩]
- Union Budget and Economic Survey, Government of India [↩]
- Tobacco Products Set to get Costlier, Times of India [↩]
- Myth of Indirect Taxes, Diary of a Libertarian Nerd [↩]