Of the various sensitive issues that
can make or break a government in India, petrol pricing is one. As on 10 Dec
'12, petrol price in India is R72.3 (Average price of Metros). If we take Delhi
as a base, it has fluctuated 30 times over the past 4 years causing an increase
by 47%.1 On May 23, 2012 petrol saw its steepest hike ever- by R7.54
leading to nationwide protests by the opposition and the general public.
Protesters in the states of Andhra Pradesh, Bihar, Odisha, Jammu and Kerala
burnt effigies of Prime Minister Manmohan Singh, set motorcycles on fire and
held placards reading "Bring down petrol prices".2
Impact on Inflation
Petrol prices account for 1.09% of
overall WPI (Wholesale Price Index). Implying that an 11.5% increase (due to
the hike of R7.54 recently) increases the inflation by 13-15 bps.3
Inflation, as we know, reduces the
purchasing power of the Rupee and effectively makes people poorer. In a country
where 77 per cent of the population spend 60-80 per cent of their meager R600
monthly income on food (according to the report of the National Commission for
Enterprises in the Unorganised Sector), the price of petrol is out of reach of
the poorer majority who cannot afford the costs of private transport.
Impact on Transportation
There are 10 crore two wheelers and 2
crore cars, of which 60%, i.e. 1.2 crore cars run on petrol, affecting about
11.2 crore vehicles in all.4, 5, 6, 7, 8 The population affected
would be even higher if we assume each vehicle is used by a family of four on
average.
Causes
To understand the cause of the hike,
let us first understand price breakup of petrol.
In any industry, the selling price of a
product is determined by adding a profit margin to the cost of production.
However, the oil industry in India is unique, in that, the actual cost of
production has no bearing on the ultimate selling price. That is because the
selling price of petrol is determined by a principle called 'import parity
pricing'. According to it, the landed cost of importing petrol at the
international retail price (Singapore Spot Market in this case) is taken as the
benchmark. Landed cost comprises the average fortnightly Singapore market price
of petrol plus Ocean freight, Customs Duty, Insurance, Ocean Loss, etc.
However, India does not import petrol (except in ignorable quantities). It
imports crude oil and refines it to obtain the end products such as petrol,
diesel, etc. 100 percent of the refining is done in domestic refineries. Hence,
the import parity price contains notional and imaginary costs that the country
doesn't actually incur.
The logic given for import parity
pricing is, had it not been for domestic refineries, India had to import petrol
refined in other countries which would include the refining profit margins
charged by the refineries of the source country and hence the refineries of
India are handed an element of rent which is measured as a percentage of
"Effective Rate of Protection". In India the ERP enjoyed by the
refineries comes to about 40%! 9
Let's break the theory down in numbers
During the year 2011-12, 24% of
domestic crude oil requirement was met by indigenous (domestic) sources.3 ONGC
sells domestic crude oil at a discounted rate of 54.71$/bbl (FY '12).10
The international price of crude oil (Indian Basket) is 105.73$/bbl as on 10
Dec '12.11 Hence, the cost of crude oil used by oil refineries for
producing petrol works out to around 93.48$/bbl. Applying exchange rate of
54.46, it is R5,092/bbl. A barrel of crude oil contains 158.98 liters.12
Hence, the crude oil component in the production cost of a liter of petrol is
roughly R32 (As per IOCL Financials it is even lesser at R30.14 for the current
year). Since the crude component constitutes around 90% of the total cost, the
total production cost including the refining and other costs comes to R35.56.13
Add to it Inland freight of 0.65, marketing cost and margin of R1.47 and
dealer's commission of R1.79.14, 15 That brings the price of petrol
before taxes to R39.47~.
So what makes R39.47 shoot up to R72.3?
Taxes comprise Excise duty of R9.48 and
state VAT which is different for each state. Let's consider an average VAT of
the Metro cities at R15~.16 Hence Taxes total up to R24.5~.
The remaining R8.3~ is the OMC margin.
But wait a minute, are the OMCs making profits? What with the media hue and cry
of OMCs reeling under huge under-recoveries? The concept of under-recoveries is
that if petrol is sold at a retail price lesser than the landed cost of
importing petrol as an end-product at current Singapore market rates and at
current exchange rate and customs duty, then the difference is a notional loss
suffered by the OMCs since they priced the product lower than what they could
have "competitively" priced. So for instance, if the landed import
cost was R75, the under-recovery would be R2.7 (75 minus 72.3). Hence, the
supposed "under-recoveries" are not real losses as we can see that
the OMCs are still making a healthy profit. In fact, with the deregulation of
petrol pricing in June 2010, OMCs are free to price petrol at international
import prices. Thus, effectively there are no under-recoveries on petrol.
However, the final price setting still has to go through the government nod and
hence is influenced by the respective governments. Also, other petroleum
products such as Diesel are still regulated. Hence there are under-recoveries
on such products. Again, under-recoveries do not mean losses. For the year
2011-12, IOCL made a net profit of R3,954 crores, HPCL R911 crores and BPCL
R1,311 crores.17, 18, 19 ONGC, which supplies indigenous crude to
the OMCs at a "discounted rate" also made a profit of R25,123 crores.
Ironically it is the no.1 profit making company in India! 20 All the
four OMCs are also part of the only eight Indian companies on the Fortune 500
List.21
Yet another issue in this regard is the
government absorbing the under-recoveries by providing subsidies to the extent
of 2/3rd of the supposed loss. The deputy chairman of the Planning Commission,
Montek Singh Ahluwalia called for a cut in fuel subsidies as these were
increasing the fiscal deficit.22 Are the subsidies actually causing
a burden on the exchequer? Let's let the figures to do the talking. During the
year 2011-12 the total fuel subsidy was R138 thousand crores of which 40% was
borne by upstream oil firms (ONGC, OIL and GAIL).23 Hence the
government effectively spent R84 thousand crores on subsidizing fuel while the
total tax collections by both central and state governments on sale of
petroleum products is R1,92,294 crores.27 If the government reduces
its taxes by the amount subsidized, they would have to give no subsidies while
still raking in the same amount of net revenues. Hence, the pointless,
so-called "subsidies" is nothing but a mechanism to fool the people
in believing that the government is taxing its exchequer for the sake of
welfare of the people.
As regards the fiscal deficit, it
amounts to approximately R5.22 lakh crores in the current year. On the other
hand, the tax concessions provided to the already-rich corporate sector comes
to around R5.28 lakh crores.24 Do the maths and you'll conclude for
yourself.
Hence, two components that almost
double the price of fuel are:
§ Corporate
profits
§ Taxes
Through the concept of public limited
companies, the government is making profits out of the sale of natural
resources and also sharing it with private players (since the shares of these
companies are traded on the stock market, private investors can hold stake by
purchasing the shares). ONGC is the highest dividend paying company in India.
Hence, the fuel price margin is added to the price which the entire population
has to bear so that few enjoy the profits. Not just that, the margin on petrol
is kept at the maximum through the dubious import parity pricing as already
discussed.
Apart from making profits by owning
majority stake in these companies, the government earns by charging exorbitant
taxes on these sales which also has been addressed.
The Islamic system
Drawing parallel to the Islamic system
in an Islamic state, both these major aspects which contribute to the spike in
prices, Privatization and taxes on natural resources are absent.
Privatization means certain things or
properties are taken out of public ownership and are placed under private
ownership. Islam does not favour privatization of those public properties and
means of production which are of common utility and keeping of which in private
hands is harmful to the interest of the community. We can observe this through
the following verses of Qur'an and Ahadith:
Allah (swt) says:
"Do not hand over to the simple-minded any
property of theirs for which Allah has made you responsible, but provide for
them and clothe them out of it, and speak to them correctly and
courteously." (An-Nisaa: 5)
Abyaz-bin-Hammal Marbi reported that
the Prophet (saw) took back a salt mine from him when he found that it was for
common use of all Muslims. (Tirmizi, Ibn Majah)
The Prophet (saw) said: "The people are partners in three
things, waters, feeding pastures and fire." (Ahmad)
According to this Hadith, all energy
resources, including oil and gas wells, coal mines and electricity generation
plants can never be privatized.
In the economic system of capitalism,
under the guise of "freedom of ownership," it allows the colonialist
and their agents to own public resources and hence oppress the masses by
selling these resources to them at unaffordable prices.
The Prophet (saw) said: "The collector of taxes will not enter
heaven." (Ahmad)
According to this Hadith, nobody is
allowed to tax the people at will and the revenues for the Khilafah's state
treasury are only those ordained by Allah (swt). This denies the ruler the
oppressive "right" to impose taxation, whenever and however he likes.
Taxes are only collected according to what is divinely ordained which is taxing
the amount that exceeds the needs and not the entire amount earned by the
person. Hence, the oppressive Direct and Indirect taxes such as MAT, VAT, CST,
etc are peculiar to the capitalist system and are absent in the Khilafah (the
Islamic state). The Indian state is heavily dependent on fuel tax revenues. In
fact, about 20% of total government revenue comes from tax collections from
sale of fuel.25
On the other hand, Islam has its own
unique system of revenue collection. Some of the sources are properties of
Zakat, Jizya (head tax), Kharaj (land tax), export revenue on public
properties, etc. which will generate funds for looking after the people,
without oppressing them.
The Islamic state will neither impose
taxes on these public properties, nor profiteer from them. This will
significantly reduce the prices of power and fuel, providing relief for the
masses and new life to the crippled industry and agricultural sector. Moreover,
Islam has mandated that the revenues generated through the export of these
public properties are placed in the Khilafah's treasuries and spent on all the
citizens of the Khilafah, regardless of their race, gender, language or
religion.26 28
References:
1^http://www.mypetrolprice.com
2^http://www.hindustantimes.com/business-news/Markets/Nation-wide-protests-on-petrol-
price-hike-may-delay-diesel-reform/Article1-860727.aspx.
3^http://www.careratings.com/Portals/0/CareAdmin/NewsFiles/Economics/Impact%20of%20Petrol%20Price%20Hike-05-25-2012.pdf
4^http://morth.nic.in/writereaddata/mainlinkFile/File420.pdf
5^http://profit.ndtv.com/news/corporates/article-5-facts-about-indias-growing-two-wheeler-market-305607
6^http://online.wsj.com/article/SB10001424052748703791904576075222569283448.html
7^http://www.worldometers.info/cars/
8^http://centreright.in/2012/05/petrol-price-hike-the-myth-of-subsidy
9^http://www.financialexpress.com/news/the-logic-of-tradeparity-pricing/92053/0
10^http://www.ongcindia.com/Financial_Highlights/ONGC_OVL_MRPL_FY12_Result.pdf
11^http://pib.nic.in/newsite/pmreleases.aspx?mincode=20
12^http://www.mcxindia.com/SitePages/ContractSpecification.aspx?ProductCode=GASOLINE
13^http://www.pib.nic.in/newsite/erelease.aspx?relid=61190
14^http://pib.nic.in/newsite/erelease.aspx?relid=73697
15^http://ppac.org.in/writereaddata/PS_3_i_DC_MS&HSD.xls
16^http://ppac.org.in/uniquepage.asp?id_pk=9#
17^http://www.iocl.com/AboutUs/AnnualReports/Profit_loss_2012.pdf
18^http://www.hindustanpetroleum.com/Upload/En/UPdf/Profit_Loss_2011-12.pdf
19^http://www.bharatpetroleum.in/Admin/Finance/SterliteDocument/F000000114_Annual%20Report%202011-12.pdf
20^http://articles.economictimes.indiatimes.com/2012-11-09/news/34994182_1_subsidy-burden-sudhir-vasudeva-oil-production
21^http://businesstoday.intoday.in/story/indian-companies-ril-ioc-in-top-100-of-fortune-500-list/1/186125.html
22^http://www.hindustantimes.com/India-news/NewDelhi/Montek-wants-fuel-subsidies-cut-further-to-tame-inflation/Article1-938946.aspx
23^http://www.reuters.com/article/2012/05/21/india-oil-subsidy-idUSL3E8GL0CP20120521
24^http://pd.cpim.org/2012/0916_pd/09162012_1.html
25^http://www.onemint.com/2012/03/20/budget-2012-where-does-the-government-get-its-money-from/
26^http://www.khilafah.com
27^http://www.business-standard.com/india/news/fm-asks-states-to-share-fuel-subsidy-burdencentre/187821/on
28^"The Economic System of
Islam" by Sheikh Taqiuddin Nabhani
~ Rough estimate
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