Last month we saw large hue and cry, especially by the opposition on Petrol prices going up by 2 rs. Now when Petrol price down Rs 2.5 a litre, diesel by Rs 2.25 (Delhi) none of these parties are coming out to praise the government.
Petrol in Delhi now costs Rs 68.38 a litre, down from Rs 70.88. A litre of diesel now comes for Rs 56.89 as against Rs 59.14 previously, *following the reduction in excise duty* on auto fuels.
The government had yesterday cut excise duty on petrol and diesel by Rs 2 per litre each to moderate the rise in fuel prices.
Although increased petrol prices are not good, but it's not something which breaks the backbone of a person. Prices were around 70 during 2014 and 80 peak now, coming down. Compared to other things, it's not something which can break the house economy for most people who can afford bike.
Congress gave us cheaper petrol, but at cost of a poor economy. The money saved in petrol was taken away in more expensive medicines, more expensive tomatoes and onions (hoarding had come down 80% because of crackdown), increased taxes, mismanagement and many other things. All these things directly affect common man. What is better for India is impossible to implement just because immediate wants of people are slightly shattered.
India is the third largest importer of crude oil in the world and it is the biggest country's expenditure. It is necessary to analyse the reasons for this price rise, deregulation of the prices, steps by government to stabilize the market, reduction in subsidy, impact of GST on Petrol and diesel prices, global scenario and future prospective. People claiming bad shape of economy or petroleum sector are mostly ignorant or victim of cunning agenda.
GST arrive but Petroleum products are still out of GST. People (especially opposition) blame Modi government of not bringing it under GST. Many other doubts and questions are raised in this regards. Few such questions are "Why petrol and diesel prices are not brought under GST"? Opposition parties often also question "Why petrol 
prices are not falling in comparison to crude oil prices. They often compare Manmohan Era with current regime.
We tried to understand the whole scenario in this article and find out the reason behind to arrive at some answer to such questions.
Now the prices of Petroleum products are market driven, not under direct control of the government. The deregulation of diesel in October 2014 by Modi govt was a landmark step that went a long way in addressing the systemic defects plaguing the sector. Subsidy is now significantly reduced in order to bring down the budget deficit, cutting the deficit by almost 35% from UPA term and meeting his target of 3.5% for FY17, new target of less than 3% for 2017–2018.
Subsidies on petroleum commodity is also significantly reduced. For example please look at the comparison between subsidy year on year. It is now reducing year on year.
Data is Amount In Crores given as Subsidy on Petrol + Diesel + Gas
Year Subsidy (In crore)
2005 ( Post ABV ) 40,000
2006 49,387
2007 77,123
2008 ( Before Election ) 1,03,292
2009 ( After winning ) 46,051
2010 78,190
2011 1,38,541
2012. 1,61,029
2013 (Before Election). 1,43,738
2014 (Modi Era Begins). 76,285
2015. 27,571
2016. 22,738
2017 (till now). 7,069
While the Congress used Subsidy always as POLITICAL TOOL to win elections, even if it means affecting and the Economy of Nation, thankfully Modi government is so far away from such populist measures. This subsidy was one of reason why prices not soar too high in Manmohan mis-managed economy.
A message is widely spread these days in social media that current petrol and diesel the central exise duty is 23% and state VAT is 34%. Total tax is 57%. If these essential products are brought under GST , the maximum tax will be only 28%, which means the prices of petrol and diesel can come down by almost 50%. The public at large will be benefited.
While the Central government has increased excise duty to take advantage of reduced crude international prices, all state governments (including all opposition) have significantly increased taxes on the commodity in order to increase their tax collection. While Petroleum Minister Shri Dharmendra Pradhan has given indication of bringing Petroleum prices under GST, most of the opposition parties have already started opposing the move. Earlier also no opposition party was ready to bring petrol prices under GST. Now most of the part of Central budget is again going to the state government further putting pressure on Central budget.
To answer this we must understand few important points
1. GST can go beyond 28%. This is already applicable for few items. Surcharge can be levied on anything in addition to GST slab. So government can still bring up the price and taxes to current level. So no saving of 50% as claimed in the above message.
2. Petrol and liquor are the biggest source of revenue for every state and central government. Most of the states were not in the favor of bringing Petrol and few other items in the gambit of GST. So in order to avoid conflict and bring consensus, few items are deliberately kept out of GST. Most of them will sooner or later come under GST though it may take time.
3. Crude oil prices are not linearly linked to petrol prices. While the crude oil prices are reduced, still the transportation, overheads, refining & production and maintenance costs are constant or increasing. So the overall effect of crude oil reduction cannot be passed as such in the petrol or diesel prices.
Now for the further analysis we should think about few points given below. According to our analysis any such move will be counter productive for economy.
There are four important reasons government isn't giving benefit (by reducing prices, reducing tasveer or _brining it under GST_ ) in petrol prices even though international prices are coming down.
1. Exchange rate ($ - Rupee).
While you have considered the fact that crude oil price have been falling, you forgot to consider the fact that, rupee has also devalued during the same period, causing a portion of crude oil price decrease to offset with the increasing exchange rate.
2008
Crude oil price - $115/bbl
Exchange Rate - $1=Rs 45
2017
Crude oil price - $48-49/bbl
Exchange rate - $1=Rs 68
2. The proportion of crude oil which can be refined to petroleum.
The amount of petrol that can be extracted out of barrel of crude oil is roughly 35% to 55%, depending upon the type of crude oil. So, the price fluctuations of crude oil that would be translating into the fluctuations in the petroleum price will depend on that proportion since it is not a linear relationship.
3. Excise duty factor.
The government, in order to avoid the free fall of the product prices which can lead to increased consumption and other effects, has been increasing the excise duty. The increased excise duty will help government recover its previous losses incurred in the form of under-recoveries, meet its fiscal deficit targets, increase its revenue in the form of taxes and help provide a cushion to the consumers when the price trend reverses. Government will reduce the excise duty factor when the crude oil prices start increasing, so that the product prices remain stable.
4. Inventory losses
Not every barrel of crude oil that the refiners refine is purchased from open market. Most of the crude oil delivered now has been purchased 3-4 months back. The decrease in price would be realized 3 to 4 months when the lower priced crude oil would be delivered to India.
In India, government no longer subsidise petrol or diesel prices. LPG for domestic purposes and kerosine are products that are subsided now. So subsidy is not the reason for reducing petrol or diesel prices, but fiscal deficit is.
India's fiscal deficit reached 90%+. Indirect tax was expected to grow at 20% as per budget. But by the end of December it the growth was only 7.3% which is much below than expected. Also PSU disinvestment was delayed till Jan-Feb. This forced govt. to raise taxes on the products which is reflected in increase in excise duties of Petrol and Diesel.
Another reason is the subsidy allocated in the budget was less than which would have actually occurred if crude prices was flat. So govt. with a possibility of higher fiscal deficit has increased the taxes as crude price dropped. Ironically these increase was not applicable to aviation fuel, prices hit less than petrol and even diesel on some days.
To be fair, it has to be said that govt. was fortunate have to lower crude prices otherwise it is likely that things will be much worse than now, economically and politically.
So bringing them under GST is not a worth idea as it'll further increase the burden on economy.
In another very significant development, a deal to supply shale oil from US is stuck in a meeting between Indian prime Minister Narendra Modi and his US counterpart, Donald Trump. In the context of around 1,500 million barrels of oil imported by India,
Very Large Crude Carrier (VLCC) docked at Paradip Port in Odisha on Monday to unload its 1.6 million barrels of shale oil. This was the first time since the US allowed exports of its oil after a ban of 40 years that it has supplied to India. Till now OPEC is the only prime source of supply to India, now it moved ahead by ordering its first consignment of 2 million barrels of shale oil for around USD 100 million.
The economic sense behind the move lies because the cartel of OPEC nations was trying to keep oil prices higher by deliberately cutting production also they charge premium on oil export, the importing oil from the US is cheaper than those from west Asia. This step is surely going to turn heads in the OPEC world as the cartel struggles to find new markets and environmental awareness puts pressure on oil demand.
The government played an important role in bringing transportation costs down as it eased restrictions on importing oil compulsorily through ships owned by Indian companies. Using a VLCC to transport oil reduced the cost of transportation and made the decision economically viable.
The Indian Oil Corporation (IOC), benefited not only from the lower price of crude but also from a better quality of the oil. Shale oil, also known as tight oil, gives the best yield for the most lucrative middle distillates. In other words, the gross refining margins (GRM) of refineries will improve if the shale oil is used.
Finally, the geopolitical benefit that India gains by purchasing US crude also needs to be taken into account. For India, importing crude oil also helps in bringing down the USD 24-billion trade deficit.
The above analysis will surely provide insight on the problem and steps taken to control the prices of oil products and overall improvement in the sector.
No comments:
Post a Comment