Petrol Prices, Bandits, and More…

Oil prices in India are sky – high. And clearly, there is a growing resentment among the commoners. As Vivek Kaul writes, “If there are two things that get people of this country interested in economics, they are the price of onion and the price of petrol racing towards Rs 100 per kg or litre, respectively.” While the triple digit figure has been touched by petrol in several places, Onions are not much behind right now. Rising prices of gas cylinders are the icing on the cake. Without wasting much time, let’s look at why this has happened.

Source – Indian Oil Corporation Limited

The above diagram shows the petrol price build up in New Delhi. One can see that the price charged to dealer (per liter) is ₹32.10. After this, a heavy excise duty of ₹32.90 is levied by the Central government. The state government then charges a VAT of 30% and retail selling price of petrol comes out to be ₹89.29. Thus, we are paying 173% of the price charged to the dealers (excluding VAT and excise duty). Since, I told you this the last time too, now let’s focus on the justifications given by the government.

The PM in a speech blamed the previous government for not cutting India’s energy import dependency which is why India’s oil consumption as well as the price is so closely connected with international oil price. While this is true, oil imports have jumped from 77% in 2013-14 to 85% in April-December 2020. So, the current government has also not done anything about it. One reason for this is the decline in the cash reserves of ONGC, the largest oil company in India. As the Indian Express writes, “[This is] largely on account of acquisitions of controlling stake in Hindustan Petroleum Corporation Ltd (HPCL) and majority stake in Gujarat State Petroleum Corporation’s (GSPC) KG Basin gas block in FY18.” By doing this, the ONGC had helped the government to meet the disinvestment target, and make some money in that process. But, the dwindling cash reserves have resulted into less expenditure in oil explorations. The expenditure on digging exploratory wells has come down from 11,687 crores in Fiscal Year 2014-15 to 4,330 crores in 2020-21.

Source – Indian Express

Now that we have looked at the factors of India’s dependence on imports, let’s come to the rising international prices. Again, the PM is very correct that India’s oil prices are closely connected with the international prices. Therefore, as the international prices rise, the local prices increase as well. But, he didn’t tell us that, although, the international prices are rising, they were all-time low last year. Instead of passing the benefit to us, government increased the taxes and took all the advantage. Also, the petrol/diesel prices right now are more than the UPA-2 tenure when international prices were much higher than today.

Source – PPAC and Ministry of Petroleum and Natural Gas – Annual Report 2013-14

Note how the Crude Oil Price of Indian Basket even crossed $100 in 2013-14 but price of Petrol and Diesel were nowhere near today’s prices. This was because the excise duty in 2014 was around ₹10.39 and ₹4.5 in comparison to ₹32.90 and ₹31.80, as of 16 Feb 2021, on one litre of petrol and diesel respectively.

India’s Finance Minister Nirmala Sitharaman, while addressing an event, said that the centre and the states need to work together to lower the fuel prices. In addition to Centre’s excise duty, State Governments also charges a Value Added Tax (VAT) on Petrol. Given this, the FM is suggesting that the states should also lower their tax rates. First we need to understand how the VAT works. The sales tax (or VAT) is charged as a percentage of dealer’s price (including the excise duty and dealer’s commission). For example: the Delhi government charge 30% of the dealer’s price. The other variation is like the Uttarakhand Government: 25% or Rs 19 per Ltr whichever is greater. Therefore, when the price offered to dealer comes down, the sales tax comes down as well. To put it another way, when the centre’s excise duty comes down the VAT decreases as well. But, the Centre right now fears that the state will increase their taxes as soon as they decide to cut the excise duty, given that both of them have been hit hard on the tax front due to the pandemic. Hence, it is very true that both the governments need to talk in this regard. Putting the petroleum products under the GST is another idea given by the FM in the same event.

All this reminds me of Mancur Olson’s theory of Roving Bandits vs. Stationery Bandits. He writes in his book Power and Prosperity that the roving bandits, come to a place, loot everything they can, all at once. Their only incentive is to steal and destroy. But, the stationery bandit lives in that place, provide facilities to the people, and loot them slowly. He has the incentive to encourage some degree of economic success so that he can make money for a long time. Olson used this theory to describe different types of government. He argued that every government is a bandit. Why do you pay taxes? Because the Government has the right to carry out violence on your land. Now, this doesn’t mean that I am against taxation. Taxes are the only way a government survives and protect our rights. But, an income tax equal to 4 months of your salary is part time slavery for government. In this case as well, the exorbitantly high taxes on petrol/diesel is just the government trying to fill their pockets (or finance their debts) tearing apart the pockets of the people in that process.

सखी सैयां तो खूब ही कमात है
मेहंगाई डायन खाए जात है

(Can be loosely translated into “O friend, my husband earns a lot, but this witch called price-rise keeps eating it all”)

– Raghuveer Yadav, Ram Sampat, Brij Mandal, and Bhadwai in Peepli Live

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