Petro Prices: Perturbed by or Perpective of?

Being a regular solo commuter driving my 'petrol' consuming bike to work every day for five days a week, let me declare upfront that I am not very happy on a personal front to bear the brunt of petrol price hike we are witnessing regularly in the past few months. The per litre cost now touching Rs. 80/-, the social media memes are expected. The angst among my countrymen too is fair, I must say; yet I believe that there is more to these turn of events than what simply meets the eye and should we not be carefully inspecting all angles before making our judgments?

If current reports are referenced, we observe that the trade parity landing cost of refined crude is approximately Rs. 27-29 /-  per litre. OMCs add another Rs 2-3/- to sell it to retailers taking the basic pre-tax pre-commission cost to Rs 30-32/-. At current price levels of Rs. 79.5/- (in Maharashtra), the implied tax component ratio is 62%. Now such a high tax component ratio for a product defies rational economic sense and hence is the core of the entire fuel pricing angst - falling global crude prices yet a high, albeit rising, per litre domestic price. This core is something I wish to ponder upon:

Firstly, One of the long standing impediments to GST was the charge by the states against the centre of being inconsiderate towards their concerns ever since the days of Dr. Manmohan Singh headed UPA-2. As of today, the GST council has accommodated state concerns which enabled the successful legislation of GST coming through. One of those concerns was shifting fuel under GST which would have led to a massive sacrifice by states in their tax revenues (as state VAT would have been merged within GST). Had fuel too been covered under GST the tax component would have dropped directly to 30% (assuming 28% GST rate and 15% cess).

Secondly, broad classification of taxes are along direct-indirect lines. While income taxes are naturally the direct form of tax collection, taxes at products sold or services offered will fall into the indirect category. Based on recently available data, approximately 2.5 cr Indians pay income taxes making the income tax payers to population ratio a meagre 2% as against 45% of a country a significant number of Indians try to emulate - USA. If I even make a conservative assumption that we have 4 members per family and the family is dependent on its earning member, the ratio multiplies to 8% which is fairly low to cover for nation. Even with the existing indirect taxes, the fiscal deficit to GDP ratio for the country had been at a precarious level of 5.8% (in 2012 - the year in which crude was around $95 a barrel and the starting time of the petrol memes on social media). From these alarming levels to a more manageable 3.5% in fiscal 2017 is no doubt an achievement. With continuous capital expenditure necessary for infrastructure and social growth, the expenses side of fiscal deficit computation isn't worth focusing on and thus we land upon government revenues which need the leg up and hence the logical arrival at the need to have higher tax revenues to fund the necessary growth.

Thirdly, continuing from the need for higher tax revenues as discussed in earlier point, with a socio-political cap on income taxes (either raising of or lower the corresponding slab rates), indirect taxes are the only saviours. Only a product which satisfies the following fits the government's target definition for more than normal indirect taxes:

a) has a large consumption base

b) is counted on the borders of essentials & luxury

c) can nudge consumption towards a more friendly alternative and

d) is eligible technically for a detailed social cost computation (i.e. where external costs like environment, society, health hazards etc over and above a product or manufacturer's private cost are significant. I have put forth this theory in one of my blogs: Expensive Externalities)

If we explore various products/services, they would fail on the above counts - Food (fails on b and d), Education (fails on d and to some extent on b), Real Estate (buying houses one fails on point a though that might be about to change with affordable housing policies and RERA), Cars (point a and b don't do together for a single category of a vehicle). The last of the above examples is coming close to satisfying all four of the above and hence its allied product called fuel is the numero uno in this exercise of identifying the right product especially with the advent of electric vehicles.

Fourthly, there can't be two central governments in any democratic nation ever - neither across time nor at any single given time. My point here being that the government is a continuum, there can be a Modi Government following a Manmohan Singh Government but there can always be only one Indian Government. This essentially means that the succeeding governments inherit the successes and failures of the past governments. This reality should never be ignored, I believe; this reality is what defines standard economic or political sense at times and leads to decisions in context - the context being, what is best for the nation. The nation today needs better social security and national security. The nation today needs faster economic growth through push in jobs and entrepreneurship both. The nation today needs greater transparency to reduce inefficiency in management of limited resources and it needs funds for that. A free market economic system has the chance for long term survival, a socialist set up is so fundamentally flawed that one can bet one's life that it will fail - a heavily oil dependent Venezuela is a classic modern day case study why a socialist freebie set up is doomed for suicidal failure thus highlighting why a subsidized economic system of India needs the help from certain products or services to free from its shackles.

Finally, I can understand the emotions behind the criticism being directed towards the government but can we not be more accommodating with a regime which is working towards fiscal constraints without hampering a structural revival of a challenging economy - note JAM, Demonetization and GST? If we as a nation and as an electorate, become more compliant and honest in our living, won't we be bringing down the costs of fuel ourselves I wonder? As a nation, if we don't evade taxes and start owning up to them, won't the tax base increase? If I assume the pyramidal model, with an increasing base, the height (i.e. the average tax rate, in this case) is bound to drop at constant tax volume. Higher banking compliance, incentivizing non-cash transactions (not only state which the government is implementing through the GEM portal but public as well, i.e. preferring vendors who accept digital payments over cash for our needs on daily rations, snacks and entertainment etc) and a citizen responsive dedicated feedback for the government to nab criminals will all go a long way in creating a fair and free economy. The great advantage that we enjoy over all Western nations is that of our populace. We don't need the 50%+ tax rates as seen in many European nations to make our economy work, we simply need the participation of 50% people in shouldering the burden and we are good to go even at 5% rates I believe.

I agree that the current petrol prices are not comfortable especially in light of much lower crude prices as compared to 2012, but neither they are unmanageable (in a nation which hails 1 lac+ phones or pay 300 each for a basic dining experience outside our home or where branded pizzas cost 1000 or essentials like education cost astronomical 5 digit sums even in kindergarden or torturous Salman Khan movies earn 200+ a ticket for wasting 2-3 hours of a person's life). Let us maintain the pressure on our government and hope for lesser taxed prices but also offer our understanding in making Bhaarat a better place to live in for our future generations.

Jai Hind!