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Petrol and Diesel prices deregulated in India

26 Jun

Yesterday, the Government of India has taken a bold decision to deregulate petrol and diesel (partially) prices in India and also come up with a price hike. petrol-price-hike-deregulation-indiaAs usual the vote bank politicians on the UPA alliance, opposition leaders and the left have voiced their protest. They claim that they are ‘with the people of India’ and whole lot of other crap. Two of the most politically spoiled states in India – The West Bengal and Kerala – have readily jumped on to ‘celebrate’ the situation with a ‘Hartal’ (strike). But do they even know how pampered the people of India already are how much they are misusing one of the most limited natural resources such as petrol (LPG and diesel as well)?

What does deregulation means?

Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to the international crude prices. In the case of diesel, though, it will be only partially regulated – the reason being an attempt to avoid sudden spike in inflation.

Why should Petrol cost more?

As all of us know, petrol (or Gasoline) is produced out of crude oil which is a natural resource that’s available in limited quantity. It is a matter of a few years before the crude gets totally exhausted. Although, there have been several crude discoveries in India, we are still dependent on the OPEC (Oil Producing and Exporting Countries) to import crude and refine it to produce petrol, LPG, diesel, aviation fuel, kerosene etc.

Petrol production cost

As of today (26 June 2010), the crude oil costs $79 a barrel (159 Litres). Since this has to be transported to India via the marine route, there is a shipping cost. Let’s say it’s something like 10%. Since the import duty on crude oil was waived sometime back, let us not count that part. Hence by the time the crude arrives in India, it is already costing something like $85 per 159L.

So the petrol refining calculation goes as follows:

Cost of 1 barrel crude: $85 or Rs. 3910.00 (exchange rate of 46)
Quantity of petrol produced from 1 barrel crude: 72L (45.4%)

Since almost 100% of the crude is refined into some product or other, we can calculate the raw material cost of producing 72L or petrol as 45.4% of the price of crude barrel.

Hence 72L petrol’s material cost alone is 3910 * 45.4 / 100 = Rs. 1775.00

Raw material cost of 1L of Petrol = 1775.00 / 72 = ~25 rupees

Obviously, the raw materials alone do not contribute to a product. You need electric power, thousands of paid employees, machinery, maintenance etc to finally produce petrol. So finally when it’s of consumable form, it is costing around 30 rupees in the oil refining spot itself.

Taxes, marketing and distribution cost

The following are the other additional expense before you can consume the petrol at your favorite gas station:

Excise duty
Education tax
VAT
Distribution and transportation cost
Dealer commission

As I understand, all the above added up comes to around 27 rupees per litre of petrol the majority of the cost is towards excise duty, transportation cost and VAT (Isn’t it a pity you have to spend more petrol or diesel to distribute petrol?)

Essentially, one litre of petrol, by the time it reaches the petrol filling stations, is costing you already Rs. 57/- without any profit added to the petroleum marketing companies. Obviously most of these companies are state run companies and hence cannot afford to reap 100% profit. Let’s turn our back on them and tell them that you can make say 20% profit. And if you add that your 1L of petrol should actually cost you around Rs. 68/-

Now, aren’t you really lucky that it’s available below Rs.60/- even with the latest hike in petrol prices?

Subsidy woes

The story is not over yet. One needs to do similar calculations for other products such as diesel, aviation fuel, kerosene and LPG. Unfortunately diesel is the primary thing that fuel public transport and distribution system in India and kerosene – LPG are house hold lifesavers when it comes to cooking purposes. In order to curb the inflation and protect the below poverty line people, the government has to subsidize it big time. A part of this subsidy cost is absorbed by the government while the oil marketing companies bear the other half. This puts some pressure on the government to increase taxes on luxury consumption sectors such as airlines by increasing aviation or jet fuel prices. They are also taxed heavily which is mainly borne by the rich or upper middle class people in India.

Why deregulation of petrol prices is good?

The deregulation of petrol prices will definitely increase the rate of inflation in short term. Virtually there will be immediate price rise in commodities and other consumables. However, for long term I think it is a good move because at the end it will definitely reduce our long term debt and fiscal deficit. Our overall economy will get stabler in this case.

Secondly, this measure will be a boost to the oil producing and marketing companies to recover their losses immediately. Remember, lakhs of people work in these huge companies and they need a life too. Moreover, the government run oil companies will be candidates for disinvestment which means that the government can lower their fiscal deficits further with additional income.

The other advantage is that the inflation, at the moment, is a fake figure. You will get to know the actual inflation and variation of commodity prices only when the petrol prices move according to the international crude prices.

This will also bring in big private players (e.g. Reliance) into the petrol marketing game. Remember that companies like Shell and Reliance used to provide excellent quality of petrol and service until Reliance pumps were forced to close down due to government regulations. This kind of competition will eventually bring in good service, good quality and in the future competitive pricing as well. The immediate woes will be compensated in the mid term – that’s my strong belief.

The government, in the meantime, should try to reduce the excise duties and restructure the VAT to minimize the impact of immediate fuel price rise on inflation and the poor people.

Long term solutions to curb petrol prices

In the long term, there are several viable solutions that needs to be done from the sourcing point to distribution and consumption.

There are possibilities of under sea pipes (just like the one we were planning with Iran for gas sourcing) from the vendor nation to India to reduce shipping cost. This has a very good long term positive impact though initial cost of incorporation is high.

The oil refining companies sourcing and storing mechanism needs to be optimized in a way that when the crude prices are low, we are able to store more. I am not sure, how much of optimization is done in this regard. Since we keep getting new and new governments every few years, they may not go for a long term plan for the same. Please remember that not too long back, the crude prices were at $35 or so per barrel.

There is a scope for improving the internal distribution system as well. Though, India has a huge geographical region, we can still have oil distribution pipes from refineries directly to the regional distribution centers. This needs long term planning.

Final thoughts

I think our citizens (and even people from rest of the world) are misusing petroleum products and this kind of abuse needs to be first controlled via price hikes and then by introducing alternate energy options and technologies to optimize the usage. There is a lot of scope for India to take out those old, fuel inefficient vehicles from our roads. I think the taxation needs to be restructured so that people and families who own more than one vehicle should be taxed more. There can be several other long term steps to improve the overall situation but please remember that at the end of it the petrol will anyhow get exhausted.

And a request to our great politicians who always oppose what the government is trying to implement. If you are really with the people of India, please come up with real practical suggestions to improve the situation. It wouldn’t be too long before you will be stone-pelt by the younger generation for preventing them an opportunity to live in a developed country by 2020.

And my questions to my friends (not the poor) who are earning in thousands and lakhs. How dare you crib about a three rupees rise in petrol while you still prefer to drive to office alone in a 5, 10 or 15 lakh car?. More over I haven’t seen you cribbing while spending 1000 rupees for a dinner or while buying a shirt worth 1500 rupees.

Think long term friends!

European Union model for Asia?

23 Jul

The outgoing President of India, Dr. APJ Abdul Kalam, has been the first citizen with a difference in many ways. Due to his non-political, non-aligned attitude and being somebody from science & technology background, he was always keen on adopting workable technical, political governance models from all around the world for the benefit of the resurgent India. Some of his dreams included the national river-linking project, two-party political model in India and Asia adopting the European Union model. In the past, several intellectuals around the world have debated over the issue of EU model adoption in the Asian context. In this article, let us analyze how EU was evolved and the preparedness of Asia to adopt such a setup.

History of European Union

The present economic-political setup called the European Union, is the culmination of half a century long planning and consolidation of several trade agreements, treaties and alliances initiated by some of the greatest politicians and visionaries in modern Europe. The call for a ‘United States of Europe‘ was arised due to the huge loss of human resource and money during the World War II, that shook many of the European countries badly. However, due to the differences in cultures, medium of communication, differences in economic status and various alliances during the war, it was not possible for all front
runner countries to come together and arrive at common agreements easily. It took almost 40 years to consolidate European Economic Community, European Community, Euratom etc into one single strong community that promoted free trading and boasted the unity of a federal country that has its own currency, president, flag, national anthem and official languages. As a result the countries that fought each other few decades back became strategic trade partners in the new setup that stood for the common cause of strong economic development.

How EU was possible?

Europe had several political, cultural and geographical advantages that made EU practically possible. First of all, most of the countries that were to be part of European Union already had reasonably stabilized economies and living standards. The disparity between member countries were not too obvious which allowed them to take a leap together for faster economic growth.

Secondly, most of the Europe has similar culture when it comes to religious practices etc. Christianity is more or less the only religion there – with one or two countries as exceptions – and hence practically the religion related issues across the board and within the boundaries are minimal (One may remember that, religion has been the single most catastrophic cause behind almost all troubles that human beings are facing in the earth right now).

The third biggest advantage for the Europe was the geographic similarities such as climate and terrain across almost all nations. Also land transportation across national boundaries was so easily possible with well-connected road and rail (Eurorail) networks.

Is Asia ready for similar model?

Coming back to the original topic, let me analyze the key issues that Asia is facing right now due to which an Asian Union is far away from realization.

Economy

Most of the Asian countries were colonies of European nations midway thorough the 20th century. Many of these countries were looted and were destabilized due to the divide-and-conquer policies of the smarter aliens. Due to the same reasons, with one or two exceptions, none of them really scaled up economically even after 30 or 40 years of achieving their freedom. To make things worse, cultural and religious priorities were took prominence over economical independence.

Cultural differences

Asia hosts the largest number of religions and caste system among its countries. There are countries that call themselves as Islamic nations, Hindustans (Hindu prominent nations), Buddhist prominent provinces and Christian countries. There are a lot more religions that play the second roles in each of these countries. Due to these huge cultural differences within the country as well as across the border, maintaining common rules, regulations and peace is relatively a costly affair. To make things worse, reservation systems, separatist movements and terrorism plays its bad roles – that mainly sprouted out of inequality.

Population

Two of the most populous countries are from Asia (To be precise six of the ten most populous nations are in Asia). The challenges thrown up by almost half the population of the world is far from manageable for India and China. Case is not different with other big countries such as Indonesia and Pakistan. Population explosion has put additional burden on the planning process of these nations, that otherwise are doing extremely good with respect to agricultural production, manufacturing and educational/health reforms.

Uneven geography

The Asian terrain is not exactly the best suited for land or sea transportation. Historically we did not have great relationships with our neighbouring countries that road and rail networks building was never given the due priority. Even the sea transportation is not at its best here. However, this is a minor point compared to others and can be worked upon if required.

Unions for different causes

There are several treaties and unions such as ASEAN, SAARC, OPEC etc in the region that stands for cooperation among selected set of countries that are ‘united’ (if you can say so) for a common cause. However, none of them are really pushing towards achieving that accelerated growth and helping each other to solve similar issues.

What’re the possible models?


I strongly believe that a single Asian Union can never become a reality in the near future. However, what can work is two or three unions that are geographically, economically and culturally similar. For example, a West-Asian union and East-Asian union are very much possible. The west Asian countries are mostly oil producing nations that are also culturally similar Islamic nations. It may be good to have a trade union among them that stands for more than oil. Similarly an East or South-East Asian Union between countries like Singapore, Japan, Malaysia, China, South Korea etc would definitely make Asia a strong player such as European Union. However, what is not practically workable at the moment is any association between the spin-offs from old USSR and its neighbouring nations. The case is not different with South Asian (SAARC) countries – there never seems to be any smooth relationship between these nations.

So dearest Kalam, your dream – of uniting Asia for free trading and economic growth – has to wait for a decade or two before it can become a reality. Hopefully by then anti-social activities such as terrorism will come down, huge disparities will cease to exist, economies will surge ahead, and public health/education systems get better throughout Asia.