Will this move help reduce petrol prices? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will this move help reduce petrol prices? 

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In this issue:
» Germany provides solace to the Eurozone
» Will China focus on boosting consumption?
» Software firms might review hedging strategies
» Why agriculture remains neglected in India
» ...and more!

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The reaction to the recent hike in petrol prices by around Rs 7.5 per litre, not surprisingly, was one of anger. The major gripe being that Indian consumers will see a hole burnt in their pockets as they struggle to meet this cost. This hike is related to petrol while that of diesel, kerosene and LPG remains unchanged. Interestingly, while this will certainly ease some pressure off oil companies in India, they are still likely to be mired in losses.

So, if a hike in overall prices is inevitable, is there another way to reduce the burden on consumers? One way being suggested is to reduce taxes on the fuel. Nearly 40% of the price of petrol is made up of taxes by the centre and the states. The central government levies a fixed excise duty of about Rs 14.78 per litre of petrol. In comparison, states impose an ad valorem (value-added) tax, which increases every time the price of the fuel increases. What is more, the extent of state tax levied on this fuel varies across states.

However, the possibility of the centre and states agreeing to slash taxes seems dim at best in the near future at least. For states, since value added tax contributes to a significant chunk of revenues, it is a cash cow that they will not let go off. This is all the more likely at a time when the finances of both the state and the centre are in disarray.

Certain states have contended that they will need this source of revenue for developmental activities. This is fine so long as there is major headway being made to ramp up infrastructure notably road building, power generation among others. If the government is only spending on unproductive areas and then looking to plug the deficit by increasing taxes then no one stands to benefit in the longer term.

Do you think that the government and states should consider reducing taxes on petrol? Share with us or post your comments on our Facebook page / Google+ page.

01:26  Chart of the day
For the first quarter of 2012 (Jan-March), the Euro area reported flat growth. The region could have reported a decline in GDP had it not been for the growth seen in Germany. Indeed, today's chart of the day shows that Germany led the pack in terms of growth in 1, 2012. The other countries struggled. Greece fared the worst as growth plunged by around 6%. Germany accounts for around 28% of the euro-area output and has contributed to 65% of the region's growth in output on an average since 2007. Little wonder then, that the country is not eye to eye with other European nations on various issues.

Data Source: The Economist

Our policymakers can take this as a consolation if they wish to. It seems that their counterparts on the other side of the Himalayas share their obsession with public sector entities. In the process, the Chinese government is doing as much damage to the country's growth as the Indian government is.

It is a known fact that companies in China prosper because of the government. In India companies prosper despite the government. The Chinese PSUs are therefore lucky to have the government's backing in their prosperity. The country's PSU banks, in particular, have achieved huge growth. Their balance sheet sizes and profits were backed by speedy lending. Reckon the performance of the world's biggest bank by market value, Industrial and Commercial Bank of China. The March quarter profits of the Chinese PSU were larger than the combined profits at JP Morgan, Citigroup and Wells Fargo! However such concentrated risks and lack of incentives for the private sector has also worried Chinese government. But every effort to induce privatization has failed again and again.

The current levels of private investment in China's regulated sectors are paltry. Private entities account for just 13.6% of investments in the power generation sector. Also, they own just 9.6% in the financial services industry. With such limited private sector participation, China's long term growth is bound to get choked. Immediate policy reforms are therefore warranted.

And while we are on China, consumption is not exactly what comes to mind when one thinks of China. This is because it is the nation's huge investment juggernaut that has always attracted the spotlight. So much so that till recently, about 46% of the nation's GDP came from investment and only 35% from consumption. However, things have become far too lopsided as per experts and it is time the dragon nation does something to boost its consumption. This is easier said than done though. And certainly cannot be achieved overnight. You see, higher consumption only happens when citizens feel certain about their jobs and their future. Not to forget the expectations of lower inflation going forward. If these factors are not present, higher savings and lower consumption is almost guaranteed.

Thus, the Chinese policymakers will have to do lot more than pay mere lip service to the idea of higher consumption. Sadly, there have been no signs of any such steps yet. Infact, China's investment drive is still continuing unabated. Little wonder, more and more experts are predicting rough times ahead for the dragon nation.

Volatility in currency has been one of the biggest concerns for the Indian software companies. Which is why these firms have been taking steps to hedge their currency risk. However, the current rupee slide seems to be luring many software companies, especially smaller ones, to review their hedging strategy. They are planning to keep a larger part of their forex positions unhedged to gain from the rupee slide. No doubt, the strategy looks good in the short term. However, the same can backfire in case rupee appreciates sharply against their expectation. We believe that IT companies would do well to maintain their hedging strategies. And not fall prey to short term gains. After all, they are in the business of exporting IT services, not in profiting from currency movements.

India is a country full of paradoxes. Take this case for instance. Wheat farmers in Haryana have had a bumper harvest this year thanks to a cool spell in February and March. But still there seems to be no end to the worries of farmers. For one, spot prices of wheat have fallen below the government's minimum support price (MSP). Secondly, with the government's procurement having closed earlier than expected, 10% of their total wheat production is just lying unsold with farmers. Thirdly, major farm costs such as diesel, fertilisers and labour have all shot up. Add to this poor logistics infrastructure which makes storage and transportation very cumbersome. With all their debt burden and high cost, the farmers have no choice but to settle for much lower prices for their produce than what is sustainable for them.

This just goes on to show how wrong policies are hurting the agriculture sector of the economy. If proper infrastructure and correct policies are not introduced with urgency, it will severely impact the long term prospects of India's agricultural sector.

Why is the dollar still going up? The greenback seems to have been defying all logic and continues to rise against major currencies. And that too, despite the American government's finances being in sorry state. The President of Euro Pacific Capital, Peter Schiff has the answer. He believes that the only reason the dollar has not collapsed yet is because people think that Europe is in worse shape than the US. This is on the back of the Greek debt saga. But the strength of the dollar may be just the calm before the storm. The currency is currently perceived as a safe haven. However, under this veil, the government continues to borrow and print money. When this will no longer be possible, the dollar could collapse, interest rates and inflation could skyrocket and the US economy could implode. This is the real risk that investors need to beware of.

In the meanwhile, the Indian stock markets have been trading strongly today on buying witnessed across the board. At the time of writing, the BSE Sensex was up by 98 points (0.6%). Sectoral indices were trading positively except realty stocks. Among Asian stock markets all except Indonesia were trading strong. Europe too opened trade in the green.

04:56  Today's investing mantra
"When purchasing depressed stock in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt." - Peter Lynch
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11 Responses to "Will this move help reduce petrol prices?"


May 29, 2012

It is interesting io know that every one is qualified to advise goverment.In my opinion instead of advising government find out ways to help yourself.Taxes on petrolium products are the one's which are least evaded.Even politicians except traveling in government vehicles are not in position to evade taxes on petrol.Tell me any other tax of similar nature,hence reducing taxes on petrol is not right.



May 29, 2012

Governments should control consumption for unproductive uses like a big convoy accompanying the ministers in the guise of protocol. why such wastage? Secondly personal uses may be subject to ceiling per minister or such dignitaries to curtail useless consumption. This may itself save lot of petrol resulting in saving of rupee slide as well.



May 29, 2012

The Government had messed up the whole petroleum issue. By allowing uncontrolled manufacture of vehicles, the consumption has increased, the loans are easily available. Now there is scarcity of both, subsidized petrol,diesel kerosene and funds to give loans.
The Government must discourage the use as it composes the major import and foreign exchange outgo of the nation. To add fuel to the fire the opposition and alliance partners are creating additional problems. In the interest of nation and economy Government must increase the fuel prices, and reduce its expenditure and discourage use of fuel. It is too late now.


Mohanasundaram S

May 28, 2012

Government should focus in finding alternate sources for imported fuel. Scientists to be given priority for this. Usage of vehicles to be reduced which will help to bring down the consumption.

Like (1)


May 28, 2012

Many parties in power in some states are protesting about the petrol price rise. It is necessary that they reduce the state tax and then protest. They should show the way to the Centre how to reduce the burden on common man. Charity should start at home.

Like (2)

Gopal Kalpathi

May 28, 2012

It will interesting to look at the history of governance and taxes. Even the tribal community have their system of taxes and governance. Whether it helps the community or a few individuals have always been a subject of debate. It is no doubt that we need both, a government as well as taxes, be it democratic, autocratic, dictatorial or socialist. We all have seen and experiencing the worlds greatest democratic country's woes where the definition of democracy originated ' by the people, of the people and for the people'. If things can go wrong there it can happen anywhere. In my opinion,unless we build the nation with time-tested ethical values, no matter which government or form comes to power, we will always be in this perpetual mode of debate. Every individual needs to look at their own needs and wants and learn to live with in their means. It is the aspirational wants (which the great western or modern economy is made up of) that fuels all of that we are discussing about. If only we start looking, individually, to lessen what we take from nature and increase our contribution towards giving back to nature a lot can be achieved.

Like (2)


May 28, 2012

How will they do it... if it impacts the freebie expenses

Like (2)

Sundar Rangan

May 28, 2012

All Governments must follow the example set by Goa. Ad valorem duties on Oil price of which is escalating on daily basis, should be discontinued. A fixed tax may be retained as in anycase all governments spend the taxes collected in the most unproductive manner ever possible. If the taxes collected had been utilised properly, the multiplier effect would have sent the govt. coffers filling. Unfortunately it only fills politicians' coffers. So taxes MUST be cut as common man is already reeling under the inept rule of UPA Govt.

Like (2)


May 28, 2012

With respect to your comment 'how wrong policies are hurting the agriculture sector of the economy'. Does anybody even know which policy will get the right response?
I know of a situation when NCDEX had just opened a terminal in a rural area with an electronic board giving ticker prices of various commodities (this is long back 2005 perhaps). And here in mumbai HO, the managers used to get incessant threats that their shop (wherever the terminal was housed) would be burnt down if the ticker board is not brought down.
Apparently, the local farmers were using that as reference and weren't selling at lower prices to the local middleman-goonda because of that!
Sir, in my humble opinion, what is needed is proper implementation of existing law and order machinery, after that the honesty/integrity of the majority of the population will take care of the rest. In absence of that, a thousand new policy initiatives will only come to naught.

Like (2)

suresh bajaj

May 28, 2012

The Governments should analyse as to what % age of money they are spending money on improving infrastructure and how much is being diverted.
In my opinion the % age utilised for the purpose it is charged is hardly 10% . 90% is being used elsewhere(Staff salaries and perks?)

Like (2)
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