What Modi Can Do On Petrol & Diesel Prices

This should be a Win-Win formula, satisficing (i.e., satisfying the minimum expectation of) all.

What Modi Can Do On Petrol & Diesel Prices
What Modi Can Do On Petrol & Diesel Prices

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.

Note:
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

Ganesan Subramanian

An Engineer-entrepreneur and Africa Business Consultant, Ganesan has many suggestions for the Government and sees the need for the Govt to tap the ideas of its people to perform to its potential.

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14 COMMENTS

  1. Adiction to petrol is bed for environment it should be over Rs. 120.00 minimum raised tax should be ringfenced and use for infrastcure project such as Railway and roads. in western world people moans about price on budget time here we pay £ 1-30 average Vijay

  2. Since we are importing 80% of the crude, we can think of allowing foreign companies to set up refineries, manufacture petrol and diesel in India. Thereby a competition is created for the national companies to reduce their white elephant cost. At the same time foreign companies will reduce the cost of importing crude to India, on account of their lesser cost of capital on account of their investment. Further competition will be created with many investments in the oil sector from abroad. Technology will improve and also the employment. Government will also get their legitimate revenue.

  3. Like tobacco, alcohol, drugs etc., ‘mankind’ has become an addict to the most injurious venom called – crude oil and its products.

    Why does nobody suggest the price of diesel/petrol should be kept ‘dissuadingly high’ or abolished altogether.

    A judicious (but a little painful initially)) combination of ‘walking’, cycling, ‘solar vehicles’ and ‘vehicles run on Gobar Gas’ will obviate the necessity of importing the noxious crude spending through our nose and inhaling death through the same.

    If only the cattle wealth of our nation (especially indigenous breed cows & bulls) are judiciously employed, all the Indians can be transported by road, rail or air @ just 10 paise per KM – that too without polluting a single air molecule.

    If democracy or elections stand in the way of implementing this, Modi should better declare emergency for 3 to 4 years for implementing this, by which time the amazingly beneficial results of this would have become obvious

    Imagine you were to get the following bonanza:
    1. Gobar cooking gas for Indians @ 100 / cyl
    2. Transport Indians @ 10 paise per KM
    3. 30 Tr saved by avoiding poisous fertilizer/pesticides
    4.:All Indians will get to eat toxin free nutritious natural organic food
    5. All the dangerously polluted cities and towns of India will transform into real ‘brindavans’
    6. All the water resources of India, which currently, are fully contaminated will rejuvenate and become fresh water spa.

    It is the evil called ‘democracy’ and the ‘necessity to win the elections’ that dissuades even our honest leaders from venturing into such bold decisions and go in for populist measures.

  4. ha ha,,suckers born every minute in this land..The writer of this article is so naive,I can only laugh.The whole foundation on taxation in India is built on socialistic model where you grab money in all permissible ways from public so that you can squander on populist schemes,extremely bloated corrupt government and especially in a corrupt India squander it to looters having access to government.Then so called educated will come to media and start blabbering why government has to tax in a punitive way.Enough of this non sense.Any tax above say 18% is punitive and crooked.120% taxation on petrol/diesel is pure robbery,when governments turn crooks, people will have scant respect for them which India has turned out to be.There will be no respect,no sanctity only abuse all around.We as a nation are almost there.BJP will get slapped when next election comes around if the fuel prices don’t come down

  5. Sri Ganesan Namaskaram.. Can you make it pictorial representation.. side by side… So that the assimilation will be better and we can download to the common person.. Appreciate your keenness in Addressing an issue which is talk of all the persons who consume petrol and diesel.

  6. Exactly. Calculate the excise and commission freezed at 60 usd the problem will be solved. Revamp the finance ministry. TOI just reported that oil ministry is suggesting to trade petrol in commodity markets. Bad idea. Beware of PC

  7. Difficult for common people to understand this logic !!
    My opinion is that petrol prices should be 100 Rs per liter n money should go to BJP govt to be spent on developments,
    THIS GOVERNMENT IS NON CORRUPT !!

  8. What About Transportation Charge ?
    What About Purification Charge ?
    What About Local Transport Charge ?

    • These (small amounts) have already been included in A, B and D appropriately. The idea was to present a simple article, as easy to understand as possible.

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