The wait is over, the government of India has finally awaken from all its political compulsions and saw that the global oil prices have increased a lot, that the oil companies in the country are making a huge loss, and hence has decided to increase the fuel prices effective from 5 June.

Petrol has increased by Rs. 5 per litre, diesel by Rs.3, and cooking gas by Rs 50! As usual, the prices will vary in different states since the states impose their additional taxes as well.

Global Oil Prices on Rise

The whole world knew that the global oil prices were on a continuous rise, thanks to the increased demand especially from India and China, the growing economies, and for the refusal of OPEC (a bunch of oil producing countries) to increase the production of crude petroleum. India, China and US together amount for over 66% of global oil consumption today. The Indian oil demand is increasing at a staggering rate of 6.5% per month! Which is why a recent US report advised India and China to invest in mass transport systems and to discourage use of cars. While I do agree that its really good for the Indian economy to invest in reliable mass transport systems, on similar lines I dont understand why US doesnt practise the same in its own country first, before preaching to others ;) US has always been using oil for luxury than for necessity, inspite of being well aware that it is a non-renewable valuable resource.

But again, its not just the increased consumption that has caused an increase in oil prices, for India and China have been developing at this rate atleast for the past 2-3 decades while the oil prices increased dramatically only in the past half decade or so. In other words the major reason for increase in oil prices has been the war on Iraq by US, alongwith a weakening US dollar! Look at the graph of oil prices in the past years and the date of the Iraqi war and you will see the truth .

What have Indian Governments done?

Coming back to India, what steps did the government take all these days while the oil prices were on a continuous rise,and even long before when the rise had been easily speculated.

The government could have built new facilities to increase our oil storage capacity to a maximum level. There was a major plan to do so by the previous NDA regime if it had returned to power. Not sure what the present UPA did about it after coming to power.

The government owned oil PSUs could have entered into forward contracts with oil suppliers which would have saved a lot of money in times of price rise. Did it do that?

The most prominent issue in political India is that political parties sacrifice the country’s development to make their political gains. Crude oil prices had increased long back and yet the government deferred price hikes because there were elections in this state, in that state, etc. At that time it did not appear to the government that oil companies owned by it were making a loss, and now that most state elections are over, they woke up and saw that global oil prices had increased a lot!

As long as we have politicians who keep their political gains above the country’s development, the dream of creating a truly welfare state in India is always at risk. Thankfully atleast there are one or two politicians who are willing to risk their political existence if it means development of the state. Narendra Modi, Gujarat’s chief minister is a classic example of this. Just few months before the elections in Gujarat, there were about 2.8 lakh people, most of them farmers who were booked in Gujarat for power theft, with thousands of them jailed! His own party members advised Modi to withdraw all cases on these people, which was a sizeable number in terms of electoral votes, and to waive off crores of rupees of fine which they had to pay to the government for stealing electricity. But Modi refused to do so saying, I am here to do politics for the betterment of society, not for my own benefits. What happened after the polls is known to everyone, Modi returned with a thumping majority proving that honest politics done in the interests of the society always pays off! Today most of Gujarat has three phased 24/7 non stop power supply, including thousands of those villages which earlier didnt see power for even about an hour per day!

Can any Congress or Left of any other chief ministers have the guts to do what Modi did? And even if they did, will they get reelected with a thumping majority as Modi did get? No, because unlike Modi, their getting elected is not based on their personal reputation and developmental work, but is purely based on appeasement politics, giving freebies, caste and religion based, etc

Unfortunately we dont have many such leaders in India today. We have governments like the one in Tamilnadu which gave free television sets and gold to come to power. We have parties which offer money, liquor during the election times to get votes. We have leaders who divide the society based on caste to win the election. We have extremenly populistic but economically disastrours political agenda like free electricity. Unless and until the common man looks beyond his immediate gains and votes with a broader mind, this kind of politics is bound to continue in the country. But a matter of relief is that slowly but steadily, as people are getting more and more educated about the reality, opportunistic politics is being defeated atleast in some parts of the country and that itself is a good signal in a country as vast as and as complicated as India.

The Tax Angle

Coming back to fuel price hike, more than 50% of the fuel prices goes in as tax to the central and state governments, again of which more than 80% goes to the central government alone in the form of customs, excise, import duties and what not. So if the government were to abolish all the taxes it collects for petroleum, then even with current international prices of crude petroleum, the price of petrol for instance would not go beyond 25 rupees per litre!!!

But at the same time, there is also a need for the government to collect taxes for petrol and diesel, and that is because, the so collected taxes will be used to subsidise other petroleum products like kerosene which are used by the poor people of this country, and hence should be available at affordable prices for the poor in the country no matter what the international oil prices are. Hence it is also incorrect to say that the government should abolish taxes on petrol and diesel altogether.

Having said that, there is absolutely no need for the government to collect almost one rupee of tax for every rupee paid to import petroleum! Also note that every time the international oil prices increase, so does the taxes collected by the government! Government makes a lot more money from taxes on petrol and diesel than what it spends to subsidize other products like kerosene. So reasonably speaking, the government can easily reduce the price of petrol to say 30 rupees per litre, even at the current prices of international crude petroleum which is at about 125-130 dollars per barrel.

So why doesnt the government do that? Because it needs all those extra money for its stupid populist agendas like giving unnecessary freebies, to promote its vote fetching tactics which simply waste the tax payer’s money and slow down the nation’s development. Atleast I feel the diesel prices should have been held at a reasonably lower rate of around 30 rupees per litre which would have gone in a long way to control inflation in the country, instead the government has decided to increase the diesel price by 3 rupees which would lead to further inflation in a already highly inflated economy, making commodities even more costlier. In other words, looks like the congress party has decided that anyway its not going to win the next elections, and so lets tax more and make more money as much as possible now and use it to promote more stupid populist agenda and announce more freebies when general elections approach next year!

The prime minister and his party are struggling to tell the common man that it is helpless since the global oil prices have increased a lot and that it has no other way but to increase the fuel prices in the country, well the question remains though that what measures did the government take when the enitre world knew that global oil prices were on the rise? Why did not the oil companies enter into forward contracts with the suppliers? Or did they? At this rate petrol price might well reach over 70 rupees per litre by 2009! Even our neighbors Pakistan and Bangladesh dont have such high prices for petrol and diesel!

Oil companies in India are in majority public sectors, owned by government, and they are making huge losses says the government due to increase global oil prices, at about Rs 225,000 crore per year. May be, but the finance ministry of the same government imposes heavy excise duty, customs duty on oil. One in every two rupees that we pay for petrol and diesel goes to the government! Every time there is an increase in global oil prices, the tax earned by the government increases as well! Why not bring down it to a reasonable level atleast during the time periods when both global oil prices are high as well as the country is struggling under high inflation?

What about the 1 lakh car for lower middle class, who will pay for its fuel? ;)

The Road Ahead for solutions

What serious measures has the government taken to reduce our dependency on the oil that we import. Maximum amount of the national income goes to import oil. While government puts up advertisements everywhere saying “save oil, save India”, what has it done on its part to save oil? A measure as simple as building good road and rail infrastructure in the country, especially in the metros and urban areas will reduce our petrol and diesel demand by a appreceative percentage. Look at the pathetic condition of the roads in the country. India is the only country I guess where we are taxed at every step of our life starting from 30% directly at our income, and then in the form of service tax, sales tax, VAT and what not, at theatres, hotels everywhere and yet the benefits that we receive in return are total nonsense. The government hospitals, the electricity supply, the water supply, the infrastructure are so horrible and have improved only in those places where we have seen privatisation. For instance, the telephone connectivity that was so bad where one had to wait months to get a new connection, now after privatisation has made the customer the king. India badly needs privatisation of all government owned companies, or atleast allow private competition in all government owned areas including electricity and water supply. Even building the road and rail infrastructure needs to be privatised. For the amount of tax we pay, the quality of roads we drive on is like the surface of moon. Out harward educated finance minister is busy offering freebies. I still dont understand how on earth a person who calls himself an economist support the freebies offered during Tamilnadu elections by the DMK like free TV, gold chains etc. Nothing that costs money comes for free Mr. Chidambaram, if you want to give something that costs money for free, give it from your pockets, not from our pockets for your votes :)

The government has finally also done some tax cuts on petroleum imports. Customs duty has been reduced from 5 per cent to nil on crude oil import and from 7.5 per cent to 2.5 per cent on petrol and diesel, which is good. But then government crying saying that it will have to incur a loss of 23000 Crore rupees because of this duty reduction makes no sense. First of all, in the past few years the global oil prices have been increasing sharply and that in itself is brining great money to the government in the form of taxes. Say for ex, when the oil price was 20$ per barrel a decade back, a tax of 5% would have got government about 1$, but today when the oil price is about 120$, a tax of even 1% would get 1.2$ !! So where is the government making losses. And moreover the oil consumption is increasing at a staggering rate of 6.5% per month in the country, which means a lot lot more oil is getting imported which in turn means even more money to the government in the form of taxes, so where and how is the government making losses? Also when we consider the fact that the rupee has become much stronger today compared to a decade back, even that adds to a greater purchasing power for the taxes collected!

The government should first concentrate on building sophisticated metro network in the urban areas and high speed rail transport across the country, along with having all its roads well conditioned and free of traffic congestion. This would go a long way in reducing our dependency on oil imports. Today during peak hours in cities like Bangalore, a car takes 45 minutes to cover a distance which by walk could be covered in 10 minutes! Footpaths meant for pedestrians are used by two wheelers during peak hours! This is the kind of infrastructure provided to us for the heavy tax that we pay. Truly in India we are, “Born Free, taxed to death” ;)

The government should invest qualitatively for the Research of alternate fuels. Even though there is a lot of research done on these lines in the country, we seem to forget things at the prototype levels. Government should initiate measures to bring these prototypes at field runs and at manufacturing levels.

More importantly I feel that the government should make public transport in all the state capitals FREE, while ensuring that it is timely, adequate, fast enough and well connected. This would attract a lot of public to use the public transport and would save billions in terms of foreign exchange spent on oil, and in this way would compensate and pay for the money used in managing the FREE public transport. There will be no traffic congestion in the cities, minimum accidents, minimal road traffic, national savings, and a lot more benefits if this is well implemented.

The government should also get rid of its fear of a stronger rupee. A stronger rupee means cheaper oil imports. Imagine the rupee becoming 20 per dollar, then it would mean we would pay only half of what we are paying today for petrol or diesel! Of course there is an export angle to it, but remember that India imports more than what it exports today, and if our products have quality in them, then other countries would anyway buy our exports! So stop worrying about stronger rupee please, of course with caution. Today India imports goods of about $120 billion compared to our exports of about $80 billion.

We have also to note here that while the price of diesel inside India is about 25% less than that of petrol, while the world diesel prices are 20% above that of petrol! Well, this is required in India because increasing diesel costs would mean an increase in the cost of almost all commodities since everything is transported in India using diesel starting from petroleum itself to vegetables, grains and what not.

On the other hand, the price of petrol in India is one of the highest in the developing world! Which means as far as petrol is concerned we in India are paying at the standards of a developed economy, while the value of the money that we earn is going down thanks to a rising inflation in the country. Without taxes, the rate of petrol would be only about Rs 23 per litre!

Look at the profits of oil companies every year. They are making whopping profits and yet the government cries about oil companies making losses due to rising oil prices. Well, the government imposes 50 Rs tax for every 100 Rs oil imported, and then gives a subsidy of Rs 25 for that oil. In other words, the government is actually taxing oil at Rs 25 for every 100 Rs, even after subsidizing kerosene, etc. Why cant the government remove this extra profits and reduce the petrol and diesel, atleast the diesel prices further? Well, as I said earlier, the government needs all this extra money to fund its freebies and cheap politics which make no economic sense. Instead of empowering poor and backward class people to earn on their own, politicians always resort to provide freebies to them, so that they continue to depend on these politicians for everything and hence continue to vote for them forever.

Another thing that I have noticed is that the vehicles mileage increases by about 10-15% when you fill your petrol from Reliance or shell petrol pumps, compared to from the pumps operated by public sector companies like BP. If you want you can check it out. This is because most public sector petrol pumps cheat in terms of the volume of petrol that they pour. Take a one litre bottle and ask them to pour one litre of petrol in it, they will never agree unless and until that particular pump is not cheating. My experience with Reliance has been great in terms of mileage, which is why I keep saying, bloody privatise everything in the country. We are fed up with this babugiri and corruption. In one of these government operated petrol pumps my friend got 40 litres of petrol filled in his 37 litre petrol tank :)

What government should understand is the solution for traffic congestion is not in building more flyovers and encouraging sale of more automobiles, but is in building mass transport systems in urban areas discouraging sale of more automobiles. Tax all those who travel alone in cars, like in Singapore. Build world class mass public transport systems which are more luxurious than the most luxurious cars. Do anything that makes sense to save oil. We can’t import oil no matter how much we pay when all the oil resources around the globe dry out. Prepare the country for that instead of trying to go along with more oil consumption. Build more cycle tracks in urban areas, subsidise cycle, make pollution free cities so that cycle riders dont have to breath all that polluted air. The LPG that is being subsidized for cooking purposes is being diverted for commercial use in vehicles, take strong measures and put a cap on that, else what is the use in subsidizing it if all it means is providing cheap fuel to car owners?

Out of every 10 litres of subsidized kerosene provided by the government about 7 litres goes to cities in India! Now how many people do we know in the cities of India who use Kerosene? Where does all that kerosene go? What is the use of subsidizing kerosene by almost Rs.30 per litre if over 70% of it enters the black market and gets commercialized and is used to adulterate petrol and for other purposes? When our family was poor about a decade back, I myself have bought kerosene from the black market at almost thrice the price offered at the government depots, since the government depots always used to run out of stock!! First of all stop the bloody corruption in this country where subsidy only means more subsidy to the corrupt rich looters. See at what price kerosene is sold in the poor villages of this country.

Electrify all train routes and make them double lined. Make sure that all goods are carried as much as possible on these trains instead of in lorries over road. This would save a lot of diesel as well as traffic and accidents on the national and state highways. It takes only about 20% of fuel to transport goods on train compared to transporting them using lorries. Look at the example set on the Mumbai to Mangalore segment for this.

To summarize, do everything to reduce the consumption of oil, not just the price of oil, for we do not want to become another US when we become a completely developed country, by becoming the most polluting country at the same time, nor do we want to have any external dependency in terms of our energy requirements.