Saturday, December 04, 2021

Battle with oil pricing

By EMN Updated: Oct 30, 2013 10:49 pm

[dropcap]E[/dropcap]very now and then stretched over a few weeks, the public in general are informed through the various media outlets that prices of petrol and diesel would be enhanced by a couple of Rupees or even by the Paisa per litre. Most people do not question but just pay the increased rates accordingly. But it is for sure that rise in fuel prices in turn has a rippling effect.
As all the commodities are transported across India on trucks that run on petrol or diesel, so increase in petrol and diesel results in price rise of these commodities as well. The greatest sufferer of all this is the common man. He is already bearing the pressure of inflation and any increase in petrol price will further reduce his actual household income.Today, every citizen spends almost half of his income on food items. If the petrol price in India keeps on increasing then every food item will get costlier. It will result in less of savings and more of expenditure. This in turn will affect the real estate, banking and other sectors in India. Eventually, more and more people will be pushed towards poverty line.
India is the world’s fourth largest consumer of energy but with low per capita energy consumption. With the ever increasing number of private vehicles—as can also be seen in our very own State itself—an overall domestic consumption of petrol and petroleum products is on rise in India. Hence more demand of petrol/diesel than supply is a leading factor of the rising prices.
While there is an element of subsidy in fuel prices faced by end-consumers, they are also taxed heavily on every purchase of fuel by both Central and State governments. In fact, the biggest beneficiary of any increase in fuel prices are the State governments, since the tax they charge on fuel is as a percentage of the price. Besides, corporate taxes and dividends are paid by the oil companies to the Central Government. This amounts to another Rs 117,000 crore or so, as of 2012-13. Ironically then, governments earn more from the sector than they pay out in subsidies to it.
That fuel prices will rise are almost a given — the effects on growth will be seen playing out in the months ahead. With the rupee crashing against the dollar, the petroleum ministry has once again highlighted the need to raise fuel prices to stem the so-called “under-recoveries” of oil companies. To be sure, the under-recoveries are not losses — they reflect the difference between the costs of importing diesel and petrol at the international price and the price at which are actually sold in the domestic market.
Government policy on exactly how the oil subsidy amounting to over Rs 1.26 lakh crore in 2012-13 — and that’s before the recent weakening of the rupee — is paid out adds to the problem. Oil companies have long complained that successive governments have been tardy in actually paying out the subsidy due to the oil companies, leading them to face a liquidity crunch in the short term. This forces them to raise short-term borrowings to meet immediate bills, affecting their bottom line.
That fuel prices will rise are almost a given — the effects on growth will be seen playing out in the months ahead. Near about 1.4 million barrels of diesel is used per day in India especially by farmers, trucks and industry. So to meet the growing demand, most of the oil is imported from other countries resulting in more expenditure. Petrol price has increased about 10 times within the period of three years and still rising. Ultimate result of price hike of petrol and diesel etc is inflation.
Also, the value of Indian Rupee is falling against the US Dollar. Due to this, OMCs (Oil Marketing Companies) have reportedly lost near about Rs 4,300 crores in the past six months for selling petrol at low cost.
To make up for this, Central leaders are more often than not, persuaded to increase the cost of particularly petrol and diesel per litre, say by about Rs five and Rs three respectively. The average consumers, who comprise the bulk, take the brunt of it and naturally feel immensely relieved when after several weeks the cost of petrol is reduced by Rs two and diesel by Rs 1.30 Paisa. Then again, after a few weeks, the prices are increased for petrol by one Rupee and diesel by 70 Paisa. So far, the new increase is yet to touch the first overall increase. Thus, the ultimate difference gives rise to various speculations on the money game. Here it involves not mere lakhs of rupees but thousands of crores.
Be that as it may, depreciating rupee is also one of the major reasons of the increase in petrol and diesel prices in India. The price of petrol used to be stable in India but with the deregulation of petrol in 2010, Oil Marketing Companies (OMCs) can increase the petrol price if large variation in cost is observed by these companies. They do so by linking the domestic price of petrol to international market rates.
Ever increasing fiscal deficit (difference between revenue and expenditure) is one of the factors leading to currency crisis in India. Present earning of government is less than its expenditure which means that fiscal deficit of government is increasing. Moreover, fiscal deficit is linked with trade deficit which means more import than export.
If the price of oil products is not increased, India will keep on facing this deficit. Price increase will decrease the demand which in turn need fewer dollars for oil import. Trade deficit will also be lowered down leading to lesser pressure on rupee-dollar rate. Not only petrol price but the price of diesel, LPG and kerosene will also be increased to have more prominent impact. This will improve the fiscal deficit of the government and lead to economic growth.
On the other hand, price rise of petrol can be controlled if the government reduces its revenue from the taxes on petroleum. Hence, petrol price for sure will increase. But indeed Government has to take strong decision as increasing prices will solve one problem but leads to many others such as poverty, inflation, high cost of living, frustration etc.
Petrol price is calculated on the basis of worldwide supply and demand factors. After buying, crude oil is transported to refineries in India which at present has 20 refineries. Crude oil is then separated into various products like petrol, diesel, coal tar, etc in distillation towers of these refineries. Cost of distillation and refining is added to the price of petrol. Also crude custom levy and charges from ports to the refinery is added.
So the actual price of petrol or diesel that a consumer pays includes all the above mentioned costs plus commission of a dealer, VAT (value added tax), excise duty, total duties and taxes. Thus, petrol price is the cost price that includes procuring, refining and marketing plus taxes that include Central and State taxes.
So who benefits from hike in fuel prices? The Government benefits, of course. But does it help economic growth?

By EMN Updated: Oct 30, 2013 10:49:50 pm