Wednesday, June 04, 2008

Fuel price hike

Finally the decision to hike fuel prices has been taken.
When the input costs double, I believe it takes 2 years to take the decision to raise the selling price. But this is the super efficient UPA government with highly learned Prime Minister and Finance Minister, highly honourable Gandhi family to sanction the government decision and the Left provide some much-needed policy help. Thus, the government finally managed to hike the price by 10% and reduce the central taxes to a certain extent.

The subsidy burden which stood at 2.45 trillion rupees will reduce by 0.45 trillion. The PSU oil companies will bear a loss of 0.65 trillion and the rest 1.35 trillion will be borne by the government.
Now for the reservation-premi government, 1.35 trillion can easily set-up 15 IITs and even provide them with working capital for years to come. Also, the subsidy goes down the drain whereas these IITs will produce engineers who will be productive in their future life.

The worst part of the subsidy and taxation structure is that it totally distorts the energy consumption pattern. Diesel that HPCL buys in Mumbai is costlier than petrol. But, the retail price of petrol is a good 40% higher than Diesel. Higher you consume higher is the subsidy that you get and more the noise you make on news channels to continue with the subsidies.
No money to oil companies means no new exploration, no city gas distribution projects and no search of the alternative to oil. Indian bio-diesel policy is waiting to be finalised by the cabinet since 5 years. Dr APJ Kalam had announced the bio-fuel mission in 2003. Countries like Brazil have changed their energy mix. All new cars use 85% ethanol.
But, in India with the distorted pricing mechanism there is no incentive to search for the alternatives.

Even the BJP is behaving like a bunch of idiots. The fuel price hike is inevitable, demand-supply law has to take precedence in a market-economy. I am also surprised as to can the average Indian be so stupid to expect the government to keep on bearing the subsidy? Government finances are not invented money like that of entrepreneurs, money given to one cause means money deducted from somewhere else. I started this post with the decision making, it remains to see how many months it takes for BEST to raise the bus fares.

As for the usual pic that accompanies the post, since Varun could not fully appreciate the last pic, this post contains none, he has to relook at the old one and see its beauty. The beauty is in the face of the girl and not the surroundings.

8 comments:

Varun Rajkumar said...

First things first... that Katrina PIc sucked big time.

Now to the more important thing: As much as I Understand that the supply and the demand needs to balance it self, Lets take this scenario:

When the finance minister devised the budget this year, the dollar rates were below 38. A cheaper dollar meant that he's earned more amount of money(as he's got petrol cheap).

Now as the oil barrel rate increased from say $80 to $150, the amount of custom and excise percentages have remained the same. Now say the tax is 10% of the cost of a barrel, which at the time of the budget was around $70, the govt earns around $7, as per planned.

Now the same 10% to $150, is around $15, which is very high and additional income. Here, I feel that now that the Govt has got its $7, it needs to reduce the duty to say 5% so that the petrol incremental costs aren't passed to the people.

The Left is very much correct when they say this. I would have loved to have them built more IIMs, but the goverment at this moment need to reduce duty at this point of time to help this settle atleast now.

Yes, in the long run, they need to increase the price. I understand this as well.

Rohit Bhute said...

Citations and cross-references needed.

Otherwise you are just blowing smoke out of your ass.

Haridas Dave said...

yea dude ... u r into a MBA now ... put ur facts and figures in a orderly fashion ... will go a long way in stressing your important points n making petty souls like us understand the issue holistically.

n as far as pictures are concerned, try not mixing them with serious topics like this. will obviously distract us from ur writing skills.

n thanx for ur comments on my blog. appreciate it.

amey ashok kulkarni said...

Comments appreciated, will put in some references next time.
But, on the post I am always making a philosophical point, 5-10% error in the figures doesn't change the argument unless the reader believes that I am quoting entirely false statstics.

amey ashok kulkarni said...

Tax on petroleum has multiple layers.
Fuel tax composes about 40% of the central government taxes. On top of that, the states impose a sales tax. With state having limited taxation capabilities, taxing fuel is an easy source of income.
Thus, reducing taxes is politically very difficult.
But, what is the point in keeping high taxes and then providing subsidies? The worst part of oil bonds is that, they don't reflect on the GOI balance sheet: only the interest payment is accounted for which is substantial. And oil bonds mean somebody has to repay them and this somebody is the next government.

Varun Rajkumar said...

Now as the oil barrel rate increased from say $80 to $150, the amount of custom and excise percentages have remained the same. Now say the tax is 10% of the cost of a barrel, which at the time of the budget was around $70, the govt earns around $7, as per planned.

Now the same 10% to $150, is around $15, which is very high and additional income. Here, I feel that now that the Govt has got its $7, it needs to reduce the duty to say 5% so that the petrol incremental costs aren't passed to the people.


-- Ur Views on this point appreciated.

amey ashok kulkarni said...

The government has done exactly what you have said. In fact the Left governments which were prompt to cut states sales tax, did exactly this, they got rid of the incremental sales tax.
But, the real irony is the multiplicity taxes, excise, customs, sales tax, VAT (yes), education cess etc.

Just reducing the taxes will no longer help as the crude price has increased tremendously threatening to create fiscal havoc.

GS said...

dudes o dudes,

why doesnt someone of you give UPSC and join the Beurocrats...

You guys would prove be excellent ones...

What say Bhutebhai! (I know you wont agree)