Deregulation is surely going to help the global market forces in determining the petrol prices in India. Post deregulation the international oil prices is going to be the determining factor for the price of petrol we pay in pumps.
As per the Kirit Parikh committee report the benefits of deregulation of oil prices far exceeds the pain the society has to bear for the spike in oil prices. The oil marketing companies should reduce the losses which in turn should increase the revenue receipts for the government and decrease the expenditure. This increase in revenues/reduced expenditure can be utilized to fund the various social sector schemes undertaken by the government.
Many may agree with the above analysis but there are a few facts that we need to consider before we give the credit to the government. Let's calculate the cost price for 1 liter of petrol.
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
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Total Rs. 33.05 p/l
After going through these facts we may realize that never in the last decade we have paid less than Rs. 40 for 1 liter of petrol. What's even more interesting is that despite the subsidies we have been paying more than the cost price of petrol (Cost price as per $80 barrel.However avg. crude oil price in this decade should be lesser than $80 per barrel).
The reason why we have been paying such high prices for petrol is because of the heavy taxes levied on it. Here is how the cost price post tax looks like
CRUDE OIL Rs. 22.5 p/l (@$80 per barrel )
Refining cost Rs. 3.5 p/l (@$0.07 refining cost)
Marketining expense Rs. 1.05 p/l
Shipping & Transport Rs. 6.00 p/l
Excise Duty Rs.14.35 p/l
CESS Rs. 0.43 p/l
VAT Rs. 3.50-5.50 p/l
customs Rs. 2.64 p/l
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Total price Rs. 53.97-55.97 p/l
It can be concluded that prior to deregulation the tax paid on petrol was greater than the subsidy provided by the government. Interestingly except for VAT all the other taxes are under the purview of the Central Government. It is going to be difficult for the state governments to reduce VAT on petrol, since there are not many heads under which they can make up for the loss they will face after reducing VAT on petrol. Hence blaming the state governments would be unfair. Deregulating without making any changes to the existing tax structure is surely going to be very unfair on the common man.
This high rates of taxation is in turn used to compensate for the under-recoveries arising from sale of kerosene and L.P.G. It is going to be difficult if not impossible to sell LPG and kerosene at market price, however it would have been better if the prices would have been hiked as per the recommendation of the committee. The government lacks political will and the guts required to touch the LPG and kerosene prices.
Looking at the government's functioning it can be said that the entire act of deregulation was mainly undertaken to increase the revenues to reduce the deficit. If this entire process of deregulation has been undertaken to reduce the deficit then I am quite sure that subsidies will be re-introduced by the U.P or L.S elections or by the next oil bubble (The government would have managed to bring down the deficits by then). The biggest beneficiaries are the oil marketing companies. However its very early to comment, its better to make conclusions only after the government meets its promise of deregulating the diesel prices and raising the LPG and kerosene prices. Finally the timing was very interesting. Bihar is the only state to go for elections this year, Congress surely is not expecting much from Bihar. So going by this logic will the government find an appropriate time to deregulate diesel and raise the prices for L.P.G and kerosene???
