Saturday, 2 June 2012

The Great Indian Petrol Price Hike - Good for you, Good for the country!

This is my second post and the first substantial post.  It is quite lengthy but that is expected given my writing style where I tend to go into enormous amounts of detail, regularly digress from the topic at hand and garnish with helpful doses of my opinion.  Please feel free to comment on the content as well as the writing.  I have gone to great lengths to ensure the accuracy of the data that has been presented however if any inaccuracies are identified please bring it to my notice by leaving a comment at the bottom.

Last week, more specifically on the 24th of May 2012, the price of Petrol was hiked in India.  It was the biggest single hike ever in both Rupee and percentage terms.  Prices were hiked by INR 7.50 which in Mumbai price terms worked out to more than 10%.  

This caused a huge outcry amongst the public with the opposition political parties even calling for a "bandh" on the 31st of May 2012 (From WikipediaBandh (Hindiबंद), originally a Hindi word meaning 'closed', is a form of protest used by political activists in some countries like India and Nepal. During a Bandh, a political party or a community declares a general strike.)

But all of that is history so why am I writing about it now.  Well that is because I do not agree with the huge public outcry.  Everyone everywhere was talking about it.  You could hear about it everywhere, in the streets, in the trains, on the TV, on the Internet.  In fact on the Internet there was such a huge surge in comments about the petrol price hike as comments about it overshadowed everything else.  The Twitter hashtag #petrolhike was the top trending tag in India on 23rd of May when the price hike was announced and remained in the top 10 list for the next few days.  Facebook was abuzz with status messages and comments about the petrol price hike and it seemed like no one had anything else to worry about altogether.  One good thing to come out of it was the humour and one image that caught my eye was this. 

And everyone it seemed was opposing the hike saying how bad it was.  I don't understand it.  The petrol hike affects you only if you own a vehicle that runs on petrol.  There is little or no impact of it on inflation and the common man.  But no, everyone wanted to join in and I noticed people on whom this hike had no impact also wanting to criticize the government on this decision.

Now let me make this clear, I am in no way happy about the increase for I am too impacted negatively by it.  I drive a petrol car everyday and the petrol price hike is no good for me.  But I am in favour of it because it is good for the country.

Let me see if I can explain it in simple enough terms.

Petrol Price Calculation

First we need to see how the price of petrol is calculated.  There is a lot of confusion around this everywhere and no one knows what the exact cost of petrol is and how much the exact taxes and duties are.  Everywhere you check for your research you will get assumed figures so I decided to get this directly from the horse's mouth.  Here is the official breakup from Bharat Petroleum for their selling price at petrol pumps in Delhi.

Price at Pump Calculation of Petrol - BPCL

I got in touch with representatives of all Oil Marketing Companies (OMCs) like HPCL, BPCL, IOC, etc and the price calculations for each of them is pretty much the same.

So now we know the exact amount of taxes on petrol.  If you add up Item # 5 and 7 in the image above, you will come to figure of INR 26.98 to be the total amount of tax per litre.  Of this INR 14.78 goes to the Central Government and INR12.20 goes to the State Government.  The amount of tax imposed by the State Government is different across states, leading to the difference in petrol prices across different states.  What also needs to be remembered is that these taxes always existed and it is not that these taxes are causing the price to be increased. It is the international price of crude oil (#1) and the rate of the US Dollar (#2) against the Indian Rupee that eventually decided the cost of petrol. All other values in the table above remain more or less the same.

Why the hike is good for you

Petrol, in India, is a rich man's fuel.  In a country where less than 4% of the population owns a personal vehicle, 75% of which are two wheelers, owning a car is considered a luxury and carries a certain amount of prestige to it. Basically less than 1% of the population of India owns a car. This might not seem right to city dwellers as we see so many cars clogging the roads but we are talking about the whole of India where about 70% of the population still stays in non-urban areas. The country where there are still a lot of villages that do not have a road, forget a car!  Forget a road, this is a country where we are still discovering new villages in 2012 that were never known to exist before.

This means that if you are indeed impacted by the price hike of petrol you are a part of the small but elite minority that is able to afford a personal vehicle.  You should consider yourself lucky that you are fortunate enough to be impacted by this price hike or would you rather be part of the other 96% that isn't?  Jokes aside, lets move on to a serious look at why the hike is a good thing.

Why the hike is good for the Country (and as a result good for you)


Prior to June 2011 the government would provide a subsidy on every litre of petrol sold at petrol pumps and hence the price of petrol was kept low.  In June 2011 the Government of India  decided to deregulate the prices of petrol such that it would not subsidize it any more and the Oil Marketing Companies would be free to decide the price of the fuel.  That was a good move because it made petrol a part of the free market where demand and supply would determine the price (like is the case for most things that you buy) and not have the price fixed by a central agency.  What was even better is the fact that there would be no subsidies.  Now this would drive up the cost but try to understand how the government gets the money to give these subsidies.  The biggest source of income for any government is taxes.  So to pay for these subsidies the government had to earn income via various direct and indirect taxes.

Subsidizing Petrol was like robbing the poor to pay the rich.  Taxes collected across the board were used to subsidize the price of petrol.  Rather wouldn't it make more sense to actually tax the rich more to subsidize the poor?  That is exactly what the government did!!! It removed subsidies from petrol and made the rich pay more from their pockets and did not use the taxes from the poor to subsidize the rich man's ride.  Now is that a bad thing?  Not at all.

So cheer up.  The government at least has the right ideas and is moving forward along the right path, which is more than what one could say for most past governments in India.

So cheer the petrol price hike because in the larger scheme of things, it is good for the country. And as we have seen in the past decade or so, if the country progresses, it is good for the citizens of the country as well.  The last ten years or so have been financially good for the country and that has reflected in every aspect of the common man's life.  A better standard of life, better facilities, a higher per capita income and I could go on.  The petrol price deregulation and related hikes are another step in the right direction for the fiscal improvement of the country and in the long run each of us will benefit from it.

In Closing

And someone needs to tell the youth of today that setting status messages on FB and tweeting about things on Twitter and forwarding SMSes is not going to change the world.  If they indeed believe in something and want to crusade for it they will have to come into the real world to make a difference.  Libya and Egypt are good examples from around the world.  The dictators there were not toppled from power by sending tweets and FB comments but by people turning up in the streets and making a difference.  Closer home, in India, one man, Anna Hazare, was able to make a difference by coming out in Ram Leela Maidan and make a much larger difference to the fight against corruption than the millions of Indians posting messages on FB, Twitter and sending millions of SMSes.

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