Petrol/ Diesel is More Expensive in India than Pakistan Due to Corporates - Vivek Kaul's Diary
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Petrol/ Diesel is More Expensive in India than Pakistan Due to Corporates

Apr 5, 2018

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Dear Reader,

This might seem like a sensational headline, which it clearly is, but by the end we hope to convince you that this column deserved this headline.

Petrol prices are at a four-year high level. Diesel prices at an all-time high. And this is the time when forwards which tell us that petrol prices are cheaper in Pakistan and other countries, start to appear.

But given that we live in an era of fake news, it first makes sense to see if that is true or not. Take a look at Table 1.

Table 1: Retail Selling Price in Neighbouring Countries
Country Petrol Diesel Kerosene LPG (14.2 Kg)
  (INRs. / Litre) (INRs. / Cylinder)
India (Delhi) 73.73^ 64.58^ 23.96# 491.35*
Pakistan 47.04 54.33 43.07 999.91
Bangladesh 68.08 51.45 51.45 629.46
Sri Lanka 48.94 39.74 18.40 679.95
Nepal 64.78 52.20 52.20 864.73

*Effective cost after DBTL subsidy
#at Mumbai ^as per IOCL.
Note - Prices for neighbouring countries on their website as on 1.4.2018
Sources: website of following companies:
Pakistan - Pakistan State Oil (www.psopk.com)
Bangladesh - Bangladesh Petroleum Corporation (www.bpc.gov.bd)
Nepal - Nepal Oil Corporation (www.nepaloil.com.np)
Sri Lanka - Petrol, Diesel, Kerosene : Ceylon Petroleum Corporation (www.ceypetco.gov.in); LPG : Litro Gas(www.litrogas.com)
Exchange rates - www.oanda.com
Source: http://ppac.org.in/content/149_1_PricesPetroleum.aspx

Table 1 has been taken from the website of Petroleum, Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas. What does it tell us? It tells us that petrol in India is clearly more expensive than in the neighbouring countries.

Also, it needs to be pointed out here that petrol and diesel are much cheaper in Delhi than in other Indian cities. Let's take the case of Mumbai. The price of petrol in Mumbai on April 5, 2018, was Rs 81.87 per litre. In Delhi, it was Rs 74.02 per litre (source: mypetrolprice.com). There is a substantial difference here and that is primarily because of lower state government taxes in Delhi on petrol than in Maharashtra. (In Maharashtra there is a drought cess that needs to be paid on petrol, even when there is no drought in the state).

Let's get back to the original point. Petrol and diesel prices are much cheaper in India's neighbouring countries. Why is that the case? Look at Table 1 carefully. Kerosene (except Sri Lanka) and LPG are much cheaper in these countries than in India. Kerosene and domestic cooking gas (i.e. LPG) are provided at a subsidised rate to a substantial part of the population.

This means that the government has to compensate the oil marketing companies which sell kerosene and domestic cooking gas, for their under-recoveries. (Whether the subsidised kerosene actually reaches the poor or is it simply used to adulterate other fuel, is a question we will leave for another day).

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In 2017-2018, the total petroleum subsidy bill for the central government was expected to be at Rs 24,660 crore. For 2018-2019, it has been projected to be at Rs 24,933 crore. This money has to come from somewhere. It comes from the tax on petrol and diesel, levied by the central government. Let's take a look at Table 2.

Table 2: Price Buildup of Petroleum Products (Rs./litre/Cylinder)
Particulars Petrol* Diesel*
Price charged to dealers (excluding Excise Duty and VAT) 33.78 35.64
Excise Duty 19.48 15.33
Dealer Commission (Average) 3.58 2.51
VAT (inc VAT on dealer commission) 15.35 9.25
Retail selling price (RSP) - Rounded 72.19 62.73

*Petrol and diesel at Delhi as per IOCL are as on 19th March, 2018.
Source: http://ppac.org.in/WriteReadData/Reports/201803200935419418532SnapshotofIndiaOilandGasdataFeb2018.pdf

Table 2 makes for a very interesting reading. It dissects the price of petrol and diesel in Delhi as on March 19, 2018. Let's first look at petrol pricing. The price charged to dealers was Rs 33.78. The retail selling price was Rs 72.19. Basically, the state government and central government collect more than 100% taxes on the dealer price of petrol in Delhi. In case of diesel, this works out to 70%. The thing is this was not always the case. Take a look at Table 3, which is based on the petrol and diesel price in Delhi, in May 2014, when the Modi government was elected and sworn in.

Table 3: Price Buildup of Petroleum Products (Rs./litre/Cylinder) at Delhi
  Petrol Diesel
Price before taxes and dealer comm. 47.12 44.98
Central taxes 10.39 4.50
State taxes 1.90 6.61
Dealer comm. 2.0 1.19
Retail selling price 71.41 57.28

Source: http://ppac.org.in/WriteReadData/Reports/201406260433429040119Snapshot_IOGD.pdf

What does Table 3 tell us? In May 2014, the central taxes and the state taxes were around 47.3% of the dealer price of petrol in Delhi. This has since then gone up to more than 100%. In case of diesel, this was at 24.7%. It has since gone up to 70% since then.

Both central and the state government have raised the tax they collect on petrol and diesel. The state governments across India have done the same. Of course, the central government has raised the tax rate more than the state governments (especially on diesel).

These taxes explain why petrol and diesel prices are higher in India than Pakistan and other neighbouring countries.

The central government and the state governments across India, since 2014, have captured a bulk of the fall in the price of oil, by increasing taxes on petrol and diesel. While the average price of the Indian basket of crude oil was $106.85 per barrel in May 2014, it had fallen to as low as $28.08 per barrel in January 2016. In March 2018, the average price of the Indian basket of crude oil was $$63.80 per barrel, still 40% lower than May 2014. A commiserate fall in petrol and diesel prices did not happen.

Raising prices on petrol and diesel is an easy way for the governments to raise money and meet their expenditure, which is precisely what they have done. It is easier than making the tax system simple and getting more people to pay tax. It is easier than shutting down public sector enterprises that have been losing money for years.

Also, to be fair the Modi government inherited a mess on the public sector banking front, which has become messier over the years (given that the ministry of finance sat on the problem and barely did anything serious to solve it, for the first couple of years).

The corporate bad loans which were at Rs 1,94,621 crore, as on March 31, 2015, increased to Rs. 6,63,877 crore, as on December 31, 2017. The total bad loans of the banking sector stood at close to Rs 9,00,000 crore.

This means that corporate bad loans made up for around three-fourths of the total bad loans of banks in India. If we look at just public sector banks, as on March 31, 2017, the corporates were responsible for more than 80% of the bad loans.

With such a massive amount of bad loans and the government wanting to continue to own 21 public sector banks, it has had to recapitalise public sector banks to keep them going. In 2017-2018, Rs 90,000 crore was set aside for this. Between 2015-2016 and 2017-2018, the government has had to set aside a total of Rs 1,40,000 crore to recapitalise public sector banks, and keep them going.

This is an expense which wouldn't have arisen, if so many corporates hadn't defaulted on such a huge amount of loans. This money needs to come from somewhere and to that extent it comes from the higher taxes on petrol and diesel.

So, the next time, dear reader, you are buying petrol and diesel, you know, who to blame for the high prices. In economics, there are no free lunches. Someone has got to bear the cost. And that someone is you, dear reader!

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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1 Responses to "Petrol/ Diesel is More Expensive in India than Pakistan Due to Corporates"

Vipul Kaji

Apr 5, 2018

Have been reading your column for past some time,
but find that you have only negative things to write,
is there nothing positive that has happened in past four years,
all FIIs are pouring in money in India by way of PMI, PE, and many other routes,
are all of them doing so as they are all fools as far investing money is considered?
Would appreciate if you can elaborate on the same.

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