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A short intro to this post seriessubmitted by galeej to IndiaSpeaks [link] [comments]
We're starting this post series that will focus on economics, policy, current affairs and politics to a certain extent from a data backed lens. The idea is to critically analyze, using relevant data, topics that citizens should ideally know and understand. The topics covered will be wide and varied.
The politics behind petrol
The price of petrol and diesel – Why is it so high?
The price of petrol and the price of diesel has been going steady like the VVS Laxman and Rahul Dravid partnership in the fabled Eden Garden test match; and just like that partnership, there does not seem to be any let up. Prices of fuel in India seem like an anomaly when compared to the prices in our neighbourhood. Its often makes for an interesting comparison article where people compare the prices of petrol across our neighbours and show how “costly” it is here.
While the price of petrol is always known to be high due to duties, it is very important to analyze why and what impact these duties have on the economy.
First, lets start off by analyzing and breaking down the price of petrol and where it goes. The table below shows the breakdown of taxes and duties for 1 litre of petrol in Delhi (oct 2021):
Split of petrol and diesel prices and its cess
As you can see, around 31% of the price of petrol goes to the central government while around 23% goes to the state government. This effectively means that around 54% - 60% of the cost of fuel goes to the government. So remember, the next time you fill a litre of petrol, you’re effectively giving 60% of the fuel price to the government as a tax.
An interesting aside to note here is that Fuel and Alcohol (consequently two cash cows for many a government) is interestingly out of the purview… likely because the GST rate stops at 28%... but that is an article for another day.
The history of pricing of petrol and diesel
Historically, India did not have a free market pricing for petrol and diesel. Petrol and diesel would be imported by the government and the government would set the price that would be payable by the citizens for using it. The advantage of this method of pricing lies in the fact that the government can choose to keep prices somewhat stable and protect the citizens from random shocks in prices that affected petrol prices during OPEC shutdowns (refer to the US petrol crisis in the mid 1960s). However, the disadvantage is that when prices continuously increase, the government will go into debt if they do not commensurately increase the price of petrol/diesel.
Backdrop in 2004 and economic impact of oil
The 2004 year ended with spiralling petrol prices due to supply related crunches. The price of crude, which was around $36 a barrel, skyrocketed to $57 a barrel. The price of oil kept increasing due to supply side constraints.
The problem with increasing oil for India meant a couple of things:
The government of India therefore decided to issue the infamous “Oil Bonds” in order to plug the gap between the total collections from citizens the additional gap. The issue? This is debt. And debt has to be repaid in the future.
The government effectively pushed the problem to the future generations for their current consumption. This was effectively mentioned by Dr. Manmohan Singh, the then PM in the quote:
“However, I would like the nation to remember that issuing bonds and loading deficits on oil companies is not a permanent solution to this problem. We are only passing on our burden to our children who will have to repay this debt” – Dr. Manmohan Singh 4th Jan 2008What initially started off as a Rs. 9000 cr oil bond in 2005 swelled into a Rs. 1.4 lac crore problem for the government in 2014.
The total interest payments alone come to close to 1.3 lac crores since the year 2011 (see table below). The table below shows the amount of principal and interest payments that have been paid since 2011 and the expected settlement patterns of the loans.
Settlement patterns for oil bonds (E is marked by Expected settlement pattern)
*Table showing current and expected settlement of oil bonds
**Source – Union budget of India (receipts)
The last of the oil bonds will be settled in 2026.
Inputs != outputs
The idea of the oil bonds was simple. The government of India raises bonds for capital today (which was used to purchase oil and subsidize it for the citizens) in lieu of a payment of interest over the course of the tenure of the bond and eventual repayment of capital (not very dissimilar to a loan taken for paying your house).
Curiouser and curiouser still is the receipts from duties. One would expect the duties to add up to the interest + principal component of the loan. Think of duties here as the EMI that you pay to your house (it’s not an accurate comparison, but it’s late in the night and this is the best I could come up with). You take a 10 lac loan to buy a house at a 7% interest rate from a bank; you would ideally expect to pay only the principal + interest in the EMIs.
However, it’s very interesting to note that the duties and surcharges are in fact much, much higher than the actual bond itself. In fact, the duties and surcharges in the 2022-23 budget (which is receipts collected in 2020-21) is in fact greater than the actual principal + interest that is due.
Breakdown of tax revenue in a budget and the corresponding cess in petrol and diesel collected
Split of revenue and share of petrol and diesel cess
**Source – Union budget of India (receipts)
Graph of share of cess/duties in petrol and diesel to overall tax revenue
Graph showing the share of petrol and diesel cess to the overall tax revenue
One can easily infer from the table and graph on the events that have transpired:
The share of collections on petrol and diesel duties has been steadily increasing from 2014. One can clearly see a huge increase from the 2016-17 numbers and the 2017-18 numbers where the share of duties as a % of tax revenue has doubled. The share has reached a mammoth 13.43% of all tax revenues collected.
The cess that was initially supposed to cover only the interest and principal payments of the bonds that were floated has now morphed into a source of revenue for the government. What is very interesting to note is that the total cess collected as per the 2022-23 budget (which show the numbers collected in 2020-21) show that the absolute value of the cess (rs. 1.92 lac crores) is greater than the total principal + interest amount that is actually due (which is a little short of 1.37 lac crores). This is somewhat like your bank collecting the entire loan amount and then some in a single year.
What can be inferred from this
A couple of things really:
Source for data: Multiple union budget documents taken from the website (https://www.indiabudget.gov.in/)
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