Fuel Subsidies Just Keep Rising - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 29 September 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
The government's most recent reform announced an increase in fuel prices in order to cut the subsidy bill. Fuel subsidies are a controversial issue, due to the fact that high fuel prices create inflation, and high subsidies are hurting government finances. Many economists have called for the government to remove fuel subsidies.

Over the last decade, the price of fuel has steadily increased. In rupees, the price of fuel has gone up approximately 130% in the last ten years. There are regional variations in price movements, but 130% is the average increase across the country. Given such a large increase, it would appear that subsidies have been cut over time.

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Let's now take a look at the factors that determine the price of petrol. The two most important factors are the price of crude oil (in US dollars), and the dollar rupee exchange rate. Over the last decade, the dollar price of crude oil has increased by 260%. This is approximately double the increase of our local price of fuel.

The dollar rupee exchange rate hasn't changed significantly over the last ten years; the rupee has depreciated around 10% during this time. This is due in large part to the strong Indian economic growth over the last decade (despite the recent fall).

If we put the two together, in rupee terms, our crude oil is costing 270% more today than it did ten years ago. However, the price we pay for our fuel has gone up by 130% in the last ten years. So our costs have increased more than double what we pay for fuel.

It is quite clear from the numbers that fuel subsidies have dramatically increased over the last decade. Even though the price of fuel has been rising, it is not keeping pace with the cost of fuel. Based on current trends, as long as the oil price is going up over time, the fuel subsidy bill is going up too.

In the long term, it is a good thing if fuel subsidies are reduced. However, the first thing to do in the short term is ensure that fuel subsidies do not increase. To do this, we need to allow the price of fuel we pay to move in line with the moves in global crude oil prices, and the dollar rupee exchange rate. Once we stabilize the fuel subsidies, we can talk about reducing them.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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6 Responses to "Fuel Subsidies Just Keep Rising"

fernswin

Oct 1, 2012

It has been a very long time that I have been saying that the subsidies should be cut. But you and I do not have the authority to do it and our opinions do not matter. This step has been left too late, and how it will be implemented now is a very frightening aspect.Mr. manmohan Singh with all his intelligence and abilities could not get his party to start this a long time back.Had he done so, would we have had to face this turmoil today? And another thing which came in the papers today and will be souted rom the roof tops is the wastage of food grains in Haryana. Where the storage capacity is only 8000 tonnes, the food and supply dept procured 70,000 tonnes.In this crunch situation, 62000 tonnes of wheat was kept in the open for months. The wheat became so rotten that the Food Corpn of India refused to lift it and termed it unfit for human consumption.This is not the first year it has
happened. Year after year this has been repeated. Crores are being spent, and what can have been distrubted to the millions of hungry mouths, has been left to rot and wasted. Who is responsible for this? Not the Agriculture Ministr, who year after year throws away wheat. So why is no action being TAKEN AND RESPONSIBLITY FIXED?In this corrupt country, the hungry will remain hungry, and the Big Crooks of ministers will keep making money.This country is a disgrace, and the crooks will never be held responsible.The poor have no hope.

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P.Prasad

Sep 30, 2012

We have become an e - society i.e., entitlement society. We want everything subsidised without understanding that there is no free lunch. Due to subsidy there is a fuel mafia like other mafia and ultimately you pay by way of inflation which is more than the subsidy you enjoyed. Its a funny world with funnier people. Lets laugh at the irony of it all.

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peekay

Sep 30, 2012

Inspite of the two reasons you have explained for high fuel cost, it is a fact that fuel cost to the consumer is much lower in all our neighbouring countries. How is that? Kindly express your views.

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Kishan

Sep 30, 2012

Mr Dossani is recommending nothing new. It was decided by the central government more than a decade back that the motor fuel prices will be freed from the control of the govt. But the present govt went back on this decision. For some time they pretended that they were not interfering in this matter, but could not keep the pretense for long. And now they are touting the five rupee increase in diesel price as a big bang reform ! Is it not pathetic ?

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Abhay Dixit

Sep 30, 2012



Since import duties play a measure role, it will also necessary to compare our fuel prices with countries with similar import dependence.

Most import duties have come down over last 12-15 years. Have duties on crude kept pace with it?

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S Kothari

Sep 30, 2012

There are actually 3 components to fuel prices. The one you omitted is govt taxes - central and local which typically are about 40% of the retail fuel cost. Despite the increase of 130% in URL prices, which means an increase of 130% in tax collections for govts, there has been no reduction in the taxes.

If the govt had a flat fuel tax structure at the rate it expected in incoming taxes from a decade ago, fuel would cost 25% less today. And given that the govt didn't expect to earn more as such since the price change is due to global crude and exchange rates, they should logically pass this price break to consumers. Or at the least use part of the taxes to reduce the fuel subsidy! But of course they won't - because these taxes line their pockets.

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