Below is a model by which the Government can reduce the price of petrol and diesel, without unduly sacrificing its interest and generating reasonable tax revenues from it.
Prices of petroleum products (especially petrol and diesel) have hogged the maximum attention of the media in recent times. What honest critics, especially middle classes, fail to see is that UPA was subsidizing the prices of petroleum products, which NDA has stopped.
UPA was spending income from other sources to subsidize the prices of petrol products. This was bad economics, which even the most knowledgeable critics among the Government acknowledged because, this subsidy money could have been better deployed on more productive capital projects, or even if it were to be spent on subsidies, it could have been better targeted at the more deserving sections of the society.
Prices of Petroleum products has become an emotive issue that the opposition uses to criticise the Government massively,
Crude oil is mostly (80%) imported, anyway, and most of this is consumed by the better off sections of the society. The argument that higher cost of diesel will have a cascading effect is not true, because, inflation, which takes this into account, is well under control.
It is true that some people among the poor and lower middle classes are impacted by the cost of petrol and diesel badly. Though their spend on this head will be a small % of their total spend, given their vulnerability, they feel the pinch more. One possible solution is that they can be given targeted benefits in some other form to offset this additional cost. But this is not the thrust of this article.
Since it has become an emotive issue that the opposition uses to criticise the Government massively, and a lot of people have bought into it, the Government should see what scope there exists to address this issue, without compromising on their policy of not resorting to subsidizing this cost.
Let’s understand what the current pricing of petrol consists of (all amounts rounded off):
A. Price of Petrol (Rs 31/ litre, derived from the price of imported crude).
B. OMCs’ (Oil Marketing Companies’) marketing costs & margin (Rs 6)
C. Excise duty charged by the Central Government (Rs 19.50)
D. Dealer’s commission (Rs 6.50)
E. VAT and local levies charged by State Governments (Rs 17.50)
All the factors: b, c, d, and e are variables based on a. The actual pricing is fairly complex; we’re not interested in getting into it. We’re only trying to come up with a model by which the Government can reduce the price of petrol and diesel, without unduly sacrificing its interest, viz, pricing it without subsidies and generating reasonable tax revenues from it.
The Government may have hoped that the crude oil prices were at a certain reasonable level, say USD 60/ barrel. At this crude price, b, c, d, and e would have been at a certain level.
All the surplus due to higher prices of crude is bonuses which the Centre, States, OMCs and the Dealers are getting are only due to rising prices of crude.
Since the Government may have been happy if these were the crude prices, it should be happy with the Excise duty due to the Central Government at this crude price. Similarly, the Centre and the States should be happy with VAT and local taxes computed at this price of crude. Similarly, OMCs’ margin and Dealer’s commission at the corresponding level should have been fair enough to the OMCs and Dealers.
All the surplus due to higher prices of crude is bonuses which the Centre, States, OMCs and the Dealers are getting are only due to rising prices of crude, with almost no cost to them.
Given the ill will the Government is earning, and given that oil prices are only likely to keep rising for some time, which would lead to even higher level of ill will of the people, which opposition is likely to exploit, the Government can come up with a pricing model whereby up to a certain price of crude (say, USD 60/ barrel), the current pricing mechanism can hold.
Above this level, since the Centre, States, OMCs, and the Dealers only get more income due only to rising prices of crude beyond the levels wished by the Government, they can forego the excess due to them above this level. This will ensure complete withdrawal of subsidy, and yet people are not taxed beyond a point. And even GST need not be brought on oil prices. Even if all states don’t agree, BJP states can agree on this formula, to start with. (which will help BJP score a point over non-BJP states)
Since this would lead to the Centre, States, OMCs and the Dealers, all taking cuts in their income without leading to a subsidy, this would be a Win-Win formula. After all, they can’t over-tax an already overburdened people, which will only lead to resentment.
This should be a Win-Win formula, satisficing (i.e., satisfying the minimum expectation of) all. I hope the Government will consider this.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.