The Rs. 7.50 Petrol Price Hike and India’s Vicious Cycle

by Manshu on May 24, 2012

in Economy

The big news today is the massive Rs. 7.50 petrol price hike and with this, petrol prices have crossed Rs. 73.00 per liter in all the metros with Bangalore being the worst at over Rs. 81.00.

Theoretically, oil market companies have hiked the prices and not the government since petrol prices are “deregulated”  but no one even pretends this is true.

In a press release issued today, IOC says that the industry has lost Rs. 4,651 crores since the last price change in December because domestic conditions (read state elections) didn’t allow any price hikes after that.

Currently, the under – recovery on petrol is Rs. 6.28 / liter which is down from Rs. 7.17 / liter in the May 12 fortnight, and 8.04/liter in April 12 2nd fortnight.

The press release also says that the current hike is not enough and there needs to be another hike of Rs. 1.50 for the rest of the year to make up for the losses that have already taken place.

The under recovery on diesel, kerosene and LPG is expected to be Rs. 1,86,000 crores in this year, and the last time the price on these was increased in July 2o11. The under recovery on diesel is Rs. 13.64 per litre and the diesel subsidy was Rs. 81,192 crores last year.

It’s hard to see why diesel prices weren’t increased first, and perhaps that’s only because they will be increased in the days to come.

There will also be a lot of political drama in the next few days where other parties will ask the government to roll back prices and will try to extract as much mileage from this unpopular decision as possible, but it is highly unlikely that anyone will touch upon the subject of how the heck do you pay for all this?

Goa’s CM recently brought out the state budget and reduced petrol prices there but he did increase taxes on a host of things to pay for it, and that’s the reality that everyone needs to acknowledge.

Unfortunately, today we’re having discussions about issues in isolation where we talk about the INR depreciating, or fiscal deficit increasing, inflation increasing or petrol price hikes but not talking enough about the inter linkages between these things. Petrol price doesn’t exist in isolation and nor does the Rupee exchange rate, these things need to be looked at holistically.

For example, the government will badly miss the deficit target for last year and one of the reasons for that is they couldn’t raise enough money through PSU disinvestments last year.

They rushed through ONGC FPO and when that had a luke warm response, LIC picked up a stake in it on which it is sitting at a loss right now.

Then recently Moody’s downgraded LIC because they said the credit worthiness of LIC is highly correlated with the government’s credit strength and this downgrade reflects badly on both of these entities.

The downgrade affects how much money flows in India by way of FII investments and that’s bound to worsen by this which in turns affects the Rupee exchange rate and contributes to its depreciation.

This in turn makes oil pricier and the hole in oil marketing companies’ pockets become larger who then have to pass over the price to the customer which causes inflation and so on and so forth.

It’s as if India’s economy has fallen into a vicious cycle and the feedback loop worsens the whole situation.

The silver lining, if there is any at all, is that the feedback loop works the other way round too, and India has been through much worse in the past and been able to get through it.

The government (this or the next) can still turn things around and focus on real issues instead of wasting time looking at issues in isolation and trying to “fix” one problem that only ends up making another worse.

{ 23 comments… read them below or add one }

wealthucreate May 24, 2012 at 7:45 am

Not Sure which direction we are heading… Rupee vs Dollar. it touched 56 we still say India Shining and rising econonmy? Rupee need to strengthen first.

Now the petrol Hike… Unless alternative fuel is not encouraged, there is not point thinking about petrol hikes. Hike in petrol means, everything else becomes expensive. Govt should encourage and give subsidy for people who use govt buses, additional benefit for people who use electric car.

We are just trying to fix the system, what i needed is comple over haul. A change in system. Do you agree?

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Manshu May 24, 2012 at 5:22 pm

India Shining and rising economy is a thing of the past, it really is. Anyone who says that or feels that there are no structural problems has probably been sleeping for the last few years.

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Indian Thoughts May 24, 2012 at 10:45 am

One and only thing to like in this article (only because of news u r covering, u continue to write amazingly) is optimism you manage to bring in end.
It surely reminds me of early 90s. just hope sum Mr Rao is still around to bite the RIGHT bullet thsi time too.

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Manshu May 24, 2012 at 5:19 pm

Gotta keep your chin up! And today is a good day as far as INR and market is concerned so that’s a good thing. I have a question for you, and I’ve asked this to a few of my friends over the past month and they have told me I’m too cynical.

Here’s my thought – looking at the current situation I feel that Manmohan Singh should get zero credit for the 91 reforms. Those were forced by the IMF and anyone in his place would have done the same, nothing more and nothing less.

What do you think?

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Sumeet Gupta May 25, 2012 at 9:30 am

Hi Manshu,

I think saying that would be discrediting both Rao and Singh. Yes, the economy was down and out in ’91 and yes we were feeling the heat. But to the credit of both of them, they took important decisions despite political pressure on them. In hindsight, it turned out to be an inspired one. Though i read somewhere that Singh was selected for FM since Rao wanted a scapegoat just in case something went wrong and a political heavyweight would not be dispensable. That’s a different story altogether.
Coming to ’12, for the price of petrol to come down, we need to lower the demand. For that, we probably need to strengthen and encourage public transport system. I stay in Gurgaon where public transport is nil and one has to rely on private vehicles to commute anywhere. Give me good public transport and why would i burn my pocket?

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Manshu May 25, 2012 at 7:28 pm

I’m not sure if they were really inspired and there was any other option. What else could they have done?

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Indian Thoughts May 25, 2012 at 11:48 am

what i think, that time he had as much to gain as much to loss out of it. This time its mostly loss-loss.
One needs freedom of thought and action to take some action. Here his own party will not support him, forget about allies, if he takes some unpopular decisions.
In 90’s that problem was taken care by Mr Rao.
Just proves one thing, good worker might nto be a good leader. Good vision in execution might not be good vision in planning too.
Thats my view abt it. I was discussing same things with a friend over a cup of tea in morning.

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Manshu May 25, 2012 at 7:27 pm

Hmmm, let’s see what happens but I’m not optimistic that anything different will come out of this government.

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Hari May 24, 2012 at 10:47 am

Are there no other options for the Government other than increasing petrol prices so regularly. Why do they not consider a reduction/rationalization in sales tax and excise duty?
I guess the current duty/tax structure is something on the lines of – Basic Excise duty, Additional Duty, Special Additional duty, Cess, Additional Cess and the State Sales Tax (which is exorbitant)
Any thoughts?

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Manshu May 24, 2012 at 5:17 pm

They can rationalize taxes like Goa or they can increase the price of Diesel, Kerosene and LPG or they can try to widen the tax net, be more effective in tax collection, a boost in growth will help that also. So anything that helps bring in revenues will help with this.

My view is that petrol prices should be completely market based and the government should have no intervention at all, but instead their energy should be focused on real reforms that have led to the current prosperity (relatively speaking).

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Himanshu Bansal May 24, 2012 at 10:45 pm

I think India still needs lot of investment in infrastructure to drive industrial growth. On the issue of rise in petrol prices, public transport can be a good substitute for using cars provided public transport is good enough. If I talk about Delhi in particular then Metro Trains have are in infancy although they are good public transport. However, if I look at the buses that were developed during Commonwealth games then I feel really bad at the current situation of buses. They are rotting with little maintenance, overcrowding and staff not knowing all the features that bus has.

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Manshu May 25, 2012 at 1:03 am

Didn’t they stop the private buses from plying in Delhi? Are they still allowed or no?

I think a big part of the problem is that the government isn’t allowing the private sector enough freedom to play a bigger role in all sectors of the economy and the standard solution for anything seems to be banning like they banned all cartoons.

Same way if blue line is causing trouble than that’s a traffic law enforcement problem and can’t be justified with a blanket ban on private sector buses altogether.

My mom told me that after the ban the maid stopped taking the bus and had to walk 2 kms because in the private bus you could just take the 2 rupee ticket which is even lower than the min and the conductor didn’t mind but the DTC conductor doesn’t allow that.

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Himanshu Bansal May 25, 2012 at 5:55 am

Private buses still ply. I agree that blanket ban or rather putting any solution without a thorough root cause analysis is a bad idea. Government has to let private firms play a bigger role and on the other hand regulators and judiciary/laws should be very strong. I feel even judiciary needs an overhaul.

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Anil singh patyal May 25, 2012 at 2:28 pm

Another hike, uffff what’s the heck? Common man lashed by central govt. Everynight drama begins. Who is responsible for this? Why central govt. Slept?

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Anil singh patyal May 25, 2012 at 2:34 pm

We need a strong contender of prime minister post like as arvind kejriwal , narendra modi , mr. Advani , kiran bedi , jairam ramesh , george fernandis , gulan nabi azad type of persons for strongest PM.

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Anil singh patyal May 25, 2012 at 2:37 pm

We want justice

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Anil singh patyal May 25, 2012 at 2:38 pm

What is gdp?

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santonu May 25, 2012 at 10:46 pm

I hear expert saying that increse in diesel/LPG price will strenghten rupee.But how?? It will lead only to high inflaton which is attrbired as one of the major reason of rupee depreciation. Moreover they say such move to increase diesel price will benifit stock market . I think except OMC, no other company will be benifited as running/working expenditure will increase. so i am confusd

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Abhishek Sinha May 25, 2012 at 11:30 pm

Hi Manshu,
Do u have any data regarding how much money Government ,both state and centre ,earn on fuel taxes and how much is the subsidy.I think the small loss that these oil companies report is a big joke comparedto the amount of money collected in taxes.I dont have data to support it though.

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Manshu May 26, 2012 at 2:46 am

I don’t have that handy but I expect that to show the opposite of what you’re saying because from the budget post I can see that the expected tax revenue for the government is 7,60,000 crores and if these people estimate subsidy loss to be as much as 1,86,000 crores then that’s not small.

This is a good point Abhishek and I’ll try to find the exact numbers for this.

http://www.onemint.com/2012/03/20/budget-2012-where-does-the-government-get-its-money-from/

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Himanshu Bansal May 26, 2012 at 5:41 pm

I’ll look forward to those numbers.

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Abhishek Sinha May 26, 2012 at 11:06 pm

I have come to the conclusion that Government is making stunning money from oil trade and wasting it elsewhere.The excise duty works out to aprox Rs.14-16per litre.Vat is Rs.15 aprox.Then there is custom duty and taxes on Oil companies.Then Income tax frim every one in Oil trade refining and marketing. This subsidy of Rs.2-5 is a jargon and big time joke on Indian People.Its like govt.is buying Crude Oil at Rs.15.All processing cost comes to Rs.15.Govt sells it to us through various agencies at Rs 75and screams loudly that they are offering doles of Rs. 2-5.Correct me if i am wrong .I would appreciate a good data source i was not able to find a good one.

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Vandhana Karthick August 12, 2012 at 8:11 pm

Peoples fate in India is to borne all as we dont any resource to get Petrol and Diesel from India. People much suffered due to hike and atleast VAT should be waived. Now in August Diesel price going to be hiked by Rs.5/- litre and over all Government will play drama and after strike they will reduce Rs.1/- its common thing every year in August.Lets wait and see what happen

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