Why Petrol & Diesel prices will stay above 100 in India forever?

Why Petrol & Diesel prices will stay above 100 in India forever?

• Currently Petrol & Diesel are hovering around 100 & 90 rupees in India and I strongly believe the prices will remain around or above these levels forever. In simple terms, 3 digit fuel price is here to stay. Let’s understand why.
• People forget to understand one critical aspect when it comes to “Freebies” and “Subsidies” from the government. Nothing is really “Free” and everything has “cost” associated with it.
• Government is just like our household, we do some work, earn money and spend that money on something. There is income and expenditure. If income is higher than expenditure, we can save the remaining. So is government budget, government collect taxes – both direct and indirect tax – which is its income and it spends the money on various schemes/projects.
• There is one more critical thing here – Imports and Exports. If a country needs to be developed, it needs to export more than it imports, which will help the finances of the country. India has always been a net Importer, which has hurt its growth for the last few decades. We need to become a net exporter if we want to grow faster.
• There are 2 things which India imports the most – they are oil and gold. That’s why these 2 items are taxed heavily in India. Importing more and more gold & oil will weaken the country’s economy and that’s why government had introduced SGBs in India. But such option is not possible for oil, that’s why it is very severely taxed India.
• Let’s say, price of Petrol is 100 rupees today. In that case, Approximately 60-65 rupees of it is purely taxes and original cost of the commodity is just 35-40 rupees. So in this case, we are almost paying 150% as taxes on the fuel – can you believe that? Out of this 60-65 rupees, approx 40-50% goes to state government and remaining goes to central government. It varies between states.
• If they bring fuel under GST, max GST tax rate at the moment is 28%, so we can get petrol for approx 50-60 rupees. But it will never happen. Why?
• Because taxes from fuel represents major form of income for the governments. 10% of income for central government comes from taxes on fuel, whereas 30-40% of state governments income comes from taxes on fuel. So states will never allow the fuel to be brought under GST.

• Also, there is the problem of Oil Bonds – which was issued by Manmohan Singh government in the UPA-2 rule, for which the current government needs to pay 1.3Lakh Crore over the next 4.5 Years.
• Considering 3Lakh crore as yearly revenue from taxes on exercise duty.
• This one aspect of oil bond payment from previous regime can raise fuel prices by 5 Rupees per litre for next 5 years.
• This is the expense UPA-2 government cleverly passed on to the future government – no forward looking government would do any such thing.
• You may say, oil prices never touched 3 digits during Manmohan Singh rule even though oil was trading near 100-150$. But the truth is Manmohan Singh government took the route of subsidy by forcing government companies take the loss for every litre of fuel sold in the country, which is again an indirect cost to the government.
• Like I said, earlier, there is no free lunch, there is no free money anywhere. So government cannot provide anything for free. If government is doing it, it indicates, they are raising prices somewhere else or indirectly passing it on to the next generation, neither of these options are healthy for the country in the long-run.
• Current government had linked the oil prices in local market with international market prices, which is a very healthy practice. All the commodities are traded in such way and oil is a commodity as well and this brings in transparency and reduces the burden on the government.

So here are the 4 reasons, which will cause the petrol and diesel prices to stay above 100 from now on.

1. Government won’t provide subsidy on fuel, which will encourage fuel usage, which in-turn will increase imports, which is unhealthy for the economy.
2. The Amount to be paid for oil bonds – which is Approx 5 rupees per litre for next 5 years, which needs to be collected to pay for mistakes of past government.
3. This government doesn’t want to pass on any such burden to future generations, so they won’t take bond route to reduce oil prices.
4. Government wants to move to hybrid option – bio fuel, electric, hydrogen fuel in the next 5-10 years, which will gradually reduce country’s import of oil and strengthen the economy in the long-term. Keeping oil prices high will give incentive for people to switch to other options.

So I strongly believe fuel prices will stay in 3 digits hence forth, what do you say?

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