Goa's unique solution on petrol prices

Mar 30, 2012

In this issue:
» India leading growth in commercial vehicles market
» Western nations responsible for USSR's economic disaster?
» Will the US housing market go the Japanese way?
» The sorry state of Chinese individual investors
» ...and more!

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High petrol prices have been hurting the pockets of consumers for quite some time. The government tends to put the entire blame on high international crude oil prices and a weak rupee. For dramatic effect, it keeps pointing at the poor state of oil marketing companies due to the high fuel subsidies. To a layperson's mind, it may all seem too confusing. If a company is forced to bleed for too long, it would go bankrupt. Then maybe, it makes sense to hike petrol prices. But what is often not highlighted is the humungous tax that both the central and state governments levy on petrol.

For instance, let's take the case of Delhi. Here, the per litre petrol price is about Rs 39. This is the price of the product after accounting for all costs. But consumers are made to pay additional Rs 25.72 per litre in the form of various taxes levied by the central and state government. The worst part is that the state government VAT is applied as a percentage of the base rate. As a result, high fuel prices increase the amount of taxes as well.

The governments at both the levels have been very shy to lower taxes on fuels. The fact that state governments collect about Rs 1.6 trillion as tax from petroleum products explains that taxes on fuel account for a significant chunk of their revenues. But a very rare event occurred recently that has caught the attention of the entire nation. Chief Minister of Goa, Manohar Parrikar proposed an 11% cut in VAT (value added tax) on petrol in his recent state budget presentation. From 2nd April onwards, petrol prices in Panaji will drop from Rs 65.61 per litre to Rs 55. This will certainly bring in the much-needed relief to not just consumers but also to Goa's tourism industry. The central government has suggested that other states also follow Goa's model. But whether they will be able to do that will depend the condition of state finances.

Do you think other Indian states should follow Goa's model and reduce taxes on petrol? Share your comments with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
Second time in a row, India has emerged as the fastest growing market for commercial vehicles (CVs). For the year 2011, India posted a significant 21.6% year-on-year rise in sales of CVs which includes buses, trucks and light cargo vehicles. The American market witnessed some recovery with a 13% YoY growth in sales. On the other hand, the Chinese and Japanese CV market witnessed a 9.9% and 5.9% YoY drop in sales, respectively. In terms of absolute market size, India is much smaller compared to these economies. While it is the 5th largest producer of passenger vehicles, in the CV market it is the 7th largest.

Data source: The Economic Times

USSR. Not very long back, this sprawling nation was a formidable rival to the US. Today though, it evokes images of all the wrong types. None more saddening than the total collapse that the economy of USSR endured and which eventually led to its splintering into small group of nations. Well, a lot of attempts have been made to find out the right reason behind the collapse of the erstwhile Soviet Republic. While some have put the blame on insufficient speed of mass privatisation, others thought that the problem was with political reforms.

Now, another theory is doing the rounds. And this one has chosen to put the blame at the door of western nations. It argues that rather than ensuring economic reforms and growth, privatisation enforced by western nations did the exact opposite and brought about an economic disaster. We completely subscribe to this point of view. We believe that the western nations were under the impression that privatisation would work like a magic wand and in one stroke, would take care of all the ills plaguing the Soviet system. But this was not to be. The Soviets had been used to socialism for a very long time. And the same had completely destroyed their work ethic. Thus, the ideal solution was to have a calibrated approach towards privatisation and not an all-out campaign. We believe this will be a big lesson for other socialist countries on how to make the transition towards free market and capitalism.

When India's eleventh five year plan was drafted (more than half a decade ago), the power capacity addition was expected to be to the tune of 78,500 MW. Sometime in the middle, the target was reduced to a more 'realistic' figure of 62,000 MW. With the 11th five year plan period coming to an end, the actual capacity addition figure fell short by about 11% of the revised target. The Power Ministry seems to be glad about the fact the country added capacity of 19,459 MW, the highest ever, this year. As per the Power Minister, India added more capacity in the last five years than in previous fifteen years.

What for the coming 12th Plan? The power generation addition target during the twelfth five-year plan, which is about to kick off in a few days, is set at about 75,800 MW. The target would have been higher had it not been for the fuel supply issues faced by the sector. But the focus for now should be on resolving issues - fuel supply mainly - relating to the power sector. Other areas of concern are securing clearances and land acquisition related problems.

The current mockery in the US housing market is a byproduct of the subprime crisis. The crisis laid its roots in early 2000 when property prices started increasing. But once the bubble burst, home prices crashed substantially. In fact, property prices in the US have been declining since the past five years. Looking at this price trend, noted economist Robert Shiller has expressed concerns that US could experience a Japanese-style housing slump which could last for years. It may be noted that after the asset bubble burst in Japan, the country lost almost two decades to recession and deflation. Asset prices hardly moved during that time and the economy went into a perennial slump. Shiller points out that since many young people in US are now opting to live with their parents while others are going for rental apartments, property prices may experience a perpetual down trend.

For an individual investor in China, making investments is not as lucrative a proposition as it is for an institutional investor. Given the need for high returns, the Chinese government has given an impetus to the latter to invest export proceeds in attractive investment opportunities across the world. That luxury is not enjoyed by the individual investor who has no choice but to keep his money in China. And that has its set of problems. For starters, interest rates in China are regulated. This means that most investors get negative returns. This is to ensure that China's state-owned enterprises with their voracious appetite for capital can borrow at cheap rates and spend it on uneconomic projects. Interestingly, this is precisely the kind of scenario that one sees in the developed economies of US, Europe and Japan. In a bid to bolster consumption, interest rates have been kept low. But this is only gradually destroying the wealth of the saving class. The latter have no lucrative avenues where they can park their funds. In other words, this is akin to what can be termed as 'financial repression.' High borrowings have been one of the root causes of today's financial crisis. But most government policies are favouring an environment conducive to taking on more debt. And this is hardly going to augur well in the long run.

Does having female directors in a company's boardroom really help? According to a study by the German Central Bank, female board members were more likely to take risks with bank's finances versus their male counterparts. Two reasons were given for the same. The survey states that these women who have scaled the corporate ladder are less experienced versus their male peers and are thus more inclined to risks. It also states that women can be more aggressive versus men in a boardroom scenario and this may lead to infighting. But, since there are very few women board members currently, we believe that these results may not be representative. Rather than condoning diversity, it may be beneficial to invest more in training women for leadership roles. Else achieving gender equality may be eons away.

In the meanwhile, the Indian stock markets have extended their gains with all the sectors trading in the green. The BSE- Sensex was trading 1.65% higher at the time of writing. Hindalco and Tata Steel were the leading gainers. The indices in other Asian markets closed mixed in today's trade. European indices have opened on a positive note.

 Today's investment mantra
"The best businesses can maintain their earnings without continued reinvestment, whereas in the worst you have to keep pouring money into a money-losing business." - Warren Buffett

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    47 Responses to "Goa's unique solution on petrol prices"


    Apr 25, 2012

    This is really a bold step by Hon. Chief Minister Of Goa State. This will really give some relief for the people of Goa in the event of high inflations. You are truly the KIng of Goa. Other States Chief Ministers should also act accordingly. Thank You.


    Mario Lobo

    Apr 18, 2012

    Mr. Manohar Parrikar, Chief Minister of Goa,has had the courage to cut Vat by 11 % and see that the price of petrol is reduced to Rs. 55/- per litre. If he can do it why can do it, why can' the Chief Ministers in other states do it?



    Apr 5, 2012

    Central leadership always scares commonman,by reiterating about depleting reserves of oil, instead of finding alternative to oil. I feel if Government merges all oil related Public Sector Companies like HPCL,BPCL,IOC,ONGC,MRPL and so on, cost of procuring oil, and deriving oil related products will come down substantially.



    Apr 2, 2012

    Perfect move by Goa CM. Kudos to him. To all my fellow participants here, who are worried about high fuel consumption, increase in pollution levels, and revenue stuff, my only request is please don't jump the gun. The decision is only a fortnight old, we have to see how this works out. Certainly, the CM wont allow Goa to go bankrupt! we would have given this bold move a thought. Indians have moved from petrol to diesel. 65% of cars on our roads are of diesel make. Cheap fuel (subsidized on tax payers money) high pollution levels are anyways here to stay. Once again I congratulate Goa CM for this move. Bravo Mr.CM.



    Mar 31, 2012

    This is bold step in the right direction. Chief Ministers of all the states should follow the example shown by the Chief Minister of Goa.


    V S Gurumani

    Mar 31, 2012

    There is a definite lack of strategic and coherent thinking in how we as a country are responding to the energy challenge. Obviously, in all such matters, the leadership has to be provided by the central government, given the quasi-federal nature of our model. Quite simply, why is it so tough to work out what should be our cost recovery mechanisms under different scenarios: crude at $90, 100, 110, 120, 130 and so on? This model will factor in the unique requirements of different states and be subject to a quarterly review. The other fly in the ointment is the way everyone expects the situation to transform overnight. Why should we not opt for a solution in which the total subsidy comes down at an agreed, cascading rate over, say, eight to twelve quarters? And, is it absolutely necessary to frame this discussion only in terms of profitablity of oil marketing companies? The very purpose of having a state-owned segment of the oil sector is being defeated by the accountant's mindset with which the huge challenge of energy pricing is being addressed in the country. Clearly, the time has come to have a sufficiently empowered oil pricing authority.



    Mar 31, 2012

    This is good from a short term perspective. But, reduction of petrol cost increases the consumption even more. In turn, increases the pollution and depletes the petroleum reserves that the world has, this in times when we have only decades of petroleum reserves left! Increase in cost is surely a huge motivator for searching for alternative energy sources. That is the way in future. There's no other option.



    Mar 31, 2012

    It is easy to reduce prices but how he will ensure growth of GOA?Same applause was given to Rly minister Shri Laluprasad & Mamta, but now to recoup those deficit Dinesh Trivedi has to resign(whole Rly staff is in favour of incresing prices).Unless from where GOA's CM will earn income for state development,it is too early to adopt model.Simple medicine is reduce non-productive & extravagant exp/subsidies. In nut-shell, such cheap popularity should not lead to Bailout of GOA state.



    Mar 31, 2012

    Really a bold decision from the publics view. But from view point of state finances and the benefit/loss that shall accrue to the govt , it is worth waiting. If this emboldens all other govts to reduce taxes on fuel and substitute with other tax raising measures , this bold CM will have done his work.


    Shyam Bhattad

    Mar 31, 2012

    It is a welcome decision coming from a solider of democracy. It is a bold move. The State and Government is going to loose lot of revenue. It is a bad decision also as it will encourage excessive use of scarcely available fuel. But it will help in developing economy as our entire needs are connected with petroleum products and the high cost adds to increase prices. Thus depriving masses from getting their basic needs. Bravo.

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