Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

The real culprit behind high fuel prices in India 

A  A  A
In this issue:
» Retail investors could now bid for more shares
» Infra debt funds to undergo proper checks
» New SBI management does a clean-up
» Japan's third recession in just a decade
» ...and more!


------------------------------------------------ 2012 Corporate Trust Poll ------------------------------------------------

We've initiated a new way to add to your income from the comfort of your home.

This Online Course will teach you how to analyse market trends... how to pick up winning trades...

how to create your own trading strategy so you can earn regular double-triple digit profits.

Thousands of our subscribers are already benefiting from this.

To know more, click here...

------------------------------------------------------------------------------------------------------------------------------


00:00  Chart of the day
 
Just some days back, the Indian oil marketing companies (OMCs) declared a sharp hike in petrol prices to the tune of Rs 5 per litre. The move came immediately after the Assembly elections of some states. That was indeed quite an opportunistic move. Even after this hike, the OMCs are still losing about Rs 5.5 per litre. So there is a fair chance that there could be another hike in petrol prices soon. Not to mention, diesel and LPG is also set to get dearer later during the month.

Source: Mumbai Mirror

The media has been constantly talking about rising crude oil prices and how the Indian OMCs are losing so much money as a result of fuel subsidies. To a logical mind, it seems obvious that if international crude oil prices are rising, there is no way we can escape the brunt of it. But if you look at some basic facts, you get a feeling that there has been some deliberate shaping of public opinion. In fact, fuel prices need not be as high as they are now.

The problem is that we fail to ask how much petrol really costs. Let's try some simple arithmetic. International crude oil prices are hovering around US$ 112.5 per barrel. That translates to about Rs 5,085 per barrel. Each barrel contains about 158.76 litres. So, effectively crude oil costs Rs 32 per litre. Now, add the cost of refining it to petrol or diesel. According to an oil company official, the refining cost is about 52 paise per litre. Add about Rs 6 as capital costs for the refinery. Then there's the cost of transportation (Rs 6) and dealer's commission (Rs 1.05). So, adding all that, the price of petrol comes to about Rs 45.6 per litre. But how much are we actually paying for petrol? Rs 68.3 in Mumbai, Rs 63.4 in New Delhi, Rs 71 in Bangalore!

Why are we paying so much more and to whom? The answer is tax. Not many are aware about the huge quantum of central and state government taxes and duties levied on fuel prices. In some states the tax component is pretty close to 50%. To add to that, these taxes are levied as a percentage of the basic price of the fuel and aren't fixed per litre. That means rising fuel prices only add more to the government's kitty. But all we hear about are the huge subsidies and the bleeding OMCs.

An optimal solution at the moment would be to reduce the tax burden on fuels. But neither the central government nor the state governments have shown any willingness to budge one bit.

Do you think the government should reduce taxes on fuel? Share your comments with us or post your views on our facebook page.

01:59
 
After doubling the maximum share application limit sometime back it seems that the market regulator SEBI has showered another freebie on retail investors. It is generally a trend for many companies to offer a discount to the retail investors at the time of an IPO/FPO. However, from here on SEBI has stated that the retail investors will be able to bid at a discounted price itself rather than the offer price.

Lets us say that you bid for an IPO where in the offer price is Rs 100 and the discount offered is 10%. So henceforth, you will be able to bid at Rs 90 (discounted price) instead of Rs 100 (offer price). This would mean that the retail investors would be able to bid for more number of shares. We believe that this is an investor friendly move considering that government has quite a few FPOs lined up in the coming months. However, in order to garner more retail participation we believe that pricing would remain a key factor rather than discount. Nonetheless, considering that the discount is offered only to retail investors it may serve the purpose of improved participation from their side.

02:43
 
Looks like the Government's ambitious infra debt funds scheme will see the light of the day shortly. For the uninitiated, this scheme is aimed at making possible the enormous investment of US$ 1 trillion in India's infrastructure over the next five years. However, raising funds is one thing and ensuring that it serves its rightful purpose another. And it is indeed the latter that is a serious matter of concern. Hence, not wanting to take any chances, the Government is putting in place strong checks on end use of funds to be invested in proposed infrastructure debt funds.

For starters, it has been decided to ask the funds to submit investment statements to SEBI on a regular basis. These will then be passed on the finance ministry to check any possible misuse. There is also a check in place to stop black money from entering the country. This will be done by way of not allowing foreign entities buying dollar denominated bonds to sell their bonds in India. Instead, they should be sold overseas only. Of course, these are just a few examples and there could well be many more checks. We just pray that the Government ensures that there is a fine balance and regulations don't end up becoming millstones around the neck of serious investors.

03:26
 
A disappointing set of numbers, even if for a quarter, can wreck havoc with market sentiments. Especially, if the numbers come from a behemoth. The market reactions to SBI's erosion of profits for the fourth quarter of FY11 were therefore no surprise to us. In fact, the result itself was well expected given the aggressive approach adopted by the bank in loan pricing over the past few quarters. Hence, the new management's inclination to clean up the act before pursuing further growth seems well timed. It may have caused some pain to investors who look for quarterly profits. But for long term investors there could be nothing better than the market mispricing stocks due to temporary hiccups. Especially, if the long term performance is likely to only get better.

03:57
 
Perhaps no country in the world has suffered in this decade as much as Japan has. The country slipped to its third recession in a decade as its economy shrank more than what was expected in the first quarter of this year. As if the global financial crisis was not enough, what hit Japan hard this quarter is the devastating earthquake and tsunami which triggered a nuclear disaster. This adversely impacted production and consumption also reduced. As a result, Japan's GDP contracted an annualized 3.7% during the March 2011 quarter. What is more, the scenario is expected to remain bleak in the second quarter as well on the back of more cuts in production and spending. But the latter half of the year is set to see a reversal as the reconstruction process starts kicking in. Meanwhile, Japan is facing the same problem that its peers are facing notably that of increased debt. It remains to be seen to what extent the reconstruction helps improving the fortunes of this beleaguered Asian country going forward.

04:30
 
In the meanwhile, the Indian stock markets have been trading mixed today. At the time of writing, the benchmark BSE Sensex was trading higher by 40 points (0.2%). Oil & Gas and IT stocks were leading the gains while realty and power stocks were trading weak. Asian stock markets too were trading mixed with Singapore and Indonesia gaining the most. However, South Korea and Taiwan were the top losers.

04:50  Today's investing mantra
"If a business does well, the stock eventually follows." - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Investing book with most page-for-page wisdom is...
October 31, 2014
Equitymaster talks about investment books which are likely to have the biggest impact on investors.
Why is an ex-central banker so bullish on gold?
October 30, 2014
Is this asset class the best bet against the US recovery?
How politicians dupe us on the black money issue...
October 29, 2014
Do you think those guilty of hoarding black money will ever meet their fate in India?
This is critical if India has to take the next big leap...
October 28, 2014
India already boasts of a strong entrepreneurial spirit and a young workforce. But is this enough for the next leap forward?
 
 
Equitymaster requests your view! Post a comment on "The real culprit behind high fuel prices in India". Click here!
148 Responses to "The real culprit behind high fuel prices in India"
pawan
Jan 19, 2014
@ shri Saji Nampoothiri, I dont why people just keep on commenting about thing that they do not know. Do you really about the salary structure of people working in oil companies? IOCL, BPCL, HPCL are the main state owened oil and gas companies, and the salary structure is same for all maharatna, navratna PSU, same for IOC, NTPC, ONGC, Power Grid, BHEL, SAIL, GAIL etc etc. So please don't spread rumors... Like (1)
PRANAV
Oct 12, 2013
Not all government officers are corrupt some are good some are bad pls dont abuse them Like (1)
Saji Nampoothiri
Mar 12, 2013
Does the government ask why the oil companiest are paying lakhs of rupees as monthly salaries to their officials when subsidy is given to them for their so-called "losses"? They spend money lavishly and extract the money from the people. If the tax is reduced, it will be easier for them to hike the prices again. so, the reduction in the tax will finally go into the pockets of the oil companies. Like (1)
siva
May 30, 2012

Jun 25, 2011
I really wonder why there are no measures taken by state governments to either remove or reduce the taxes on petroleum products to facilitate the livelihood of common man. Rise in the crude oil price in international market is unavoidable, keeping common man's condition in mind state governments should nullify the taxes imposed on all the petroleum products. I feel the tax system should be revised I wonder when we are paying income tax to Central Government, why there is a need to pay tax for State Governments for each and everything when states comes under Center. Why not exempt road tax and state tax for oil tankers travelling throughout India. These things will definetely reduce the price of petroleum products and we can sustain even if there is rise in international crude oil price. This price rise also can be attributed to recent corruption; if tax paid by us is utilized properly we wouldnt have to witness these days at all (rise in petroleum products).
Like (2)
dilip
May 24, 2012
Where government of India is spending this petrol tax revenue? Hope this is not spent on the maintenance of luxuries of our so called leaders Like (7)
kailash 9893286091
Apr 3, 2012
45% of india excise duty is earned by oil products in india
and more than that amt tax is also collected by state government . centarl govt give about 20% subsidy of tax collected and custom tax is also cellected by central govt on crude imports and other taxes on crude during production and income tax on profit earn by refineries in india total consumrtion of crude in india in2010 1s about 5.5 lakc crores nearby 80% of that amount is collected byaround 4.4 lac crores by both central and states governments inspite of that abhi tak super corridor roads are not completed toll also collected where the money goes still today 40% of indian population is fprced to live without power in india it is the matter of shame for all leader montek singh ahuwalia represent planing comission say that 45 rs earning capacity per day is not poor i ask i question any body of planing commissio top official is ready to live with amount for only one year they plan for indian only 1350 rs per month it is shameful they have not any right to continue the member of planning commissionjust disgusting
Like (6)
K.P.Pradyumna
Apr 2, 2012
Thank you for your valuable reply and linking to an earlier article which had lost my attention. thank you again for giving a detail of structure of oil pricing. I hope you would not mind if I translate this article and send it to Kannada news papers for the benefit of common reader- ofcourse quoting your mail as resource. let me translate and on hearing from you I will send for publication. Like (1)
Mukesh
Mar 21, 2012
It is not just government only. People should also start give up their luxury. Otherwise petrol prices can't be maintained. You are not living in USA and Gulf. If really want to lower petrol prices start minimizing big cars and air conditioners. Like (6)
harsha
Mar 16, 2012
all politicians and govt workers are corrupting india by doing frod ............they should be ashamed to be a indian and they should not be indian........... Like (4)
Azhaguvel
Feb 28, 2012

Is this the fate of common man in India...

Digest everything start from the politicians...policy ,makers... corruptions. taxes... and issues with the basic necessary of fuel...?

We, the common man could do anything more than expressing their anger over here...?
Like (5)
   Next>>
Equitymaster requests your view! Post a comment on "The real culprit behind high fuel prices in India". Click here!
 

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

© Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Our investment recommendations are general in nature and available electronically to all kind of investors irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any investment decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: 91-22-6143 4055. CIN:U74999MH2007PTC175407