The Indian consumer does not get any subsidy on petroleum products

 light-diesel-oil-250x250Vivek Kaul  

The Ministry of Petroleum and Natural Gas released the under-recovery numbers on the sale of diesel, cooking gas and kerosene, on February 3, 2014.
The under-recovery for cooking gas as on February 1, 2014, stood at Rs 655.96 per cylinder, whereas the under-recovery on diesel and kerosene stood at Rs 7.39 per litre and Rs 35.77 per litre.
The price that oil marketing companies charge dealers who sell diesel is referred to as the realised price or the depot price. If this realised price that is fixed by the government is lower than the import price, then there is an under-recovery. Having said that under-recoveries are different from losses and at best can be defined as notional losses. (For those interested in a detailed treatment of this point,
 can click here).
These under-recoveries are typically referred to as subsidies (both in the media as well as by politicians) that the government is providing to the citizens of this country. But the question is it fair to call this a subsidy? A criterion that t
he International Energy Agency uses for defining something as a subsidy is whether it “lowers the price paid by energy consumers.”
As 
A Citizens’ Guide to Energy Securityin India points out “consumer subsidies, as the name implies, support the consumption of energy, by lowering prices at which energy products are sold.” That is clearly not the case in India. As Surya P Sethi writes in an article titled Analysing the Parikh Committee Report on Pricing of Petroleum Products“It is clear that Indian consumers are paying the highest price for lower quality petrol and more for lower quality diesel when compared to the US and Japan – the two most vociferous proponents of removing fuel subsidies. Also, Japan and the UK and, indeed, several other countries tax diesel at a lower rate.”
A large portion of the price that consumers pay for buying petrol, cooking gas and diesel is passed onto the state governments and the central government in the form of various taxes. Excise duty collected by the central government and the sales tax collected by the state governments are the two major taxes. (In 2012-2013, the central government collected Rs 62,920 crore as excise duty. On the other hand state governments collected Rs 1,10,875 crore as sales tax.) Hence, the oil marketing companies (OMCs i.e. IOC, BP and HP) are not being adequately compensated for selling petroleum products (this does not include petrol), despite the high price. The government, in turn, compensates them for these under-recoveries.
Let’s throw in some numbers here. Data from the Petroleum Planning & Analysis Cell, a part of the Ministry of Petroleum and Natural Gas, shows that in 2012-2013 that the various state governments and the central government collected Rs 2,43,939 crore as taxes on the sale of various petroleum products. A small part of this income was also in the form of dividends.
Against this, the total under-recoveries on the sale of diesel, cooking gas and kerosene came in at Rs 1,61,029 crore. As is well known the central government did not pay this entire amount to the OMCs from its own pocket. It got the upstream oil companies like Oil India Ltd and ONGC to contribute towards the same as well.
The broader point is that the governments collected Rs 2,43,939 crore as taxes even though under-recoveries were at Rs 1,61,029 crore. This is a difference of more than Rs 80,000 crore here. In 2011-2012 this difference was more than Rs 90,000 crore. So the question is who is subsidising whom? It is clear that the end consumer is not being subsidised.
As the article titled 
The Political Economy of Oil Prices in India points out “The total contribution of the oil sector to the exchequer has been higher than the sum of under recoveries of the OMCs and direct subsidies on petroleum products for all the years since fiscal 2004…Even the sum of duties (customs and excise) and (sales) taxes on petroleum products, which is only a fraction of the total contribution of the oil sector to the exchequer, has exceeded the sum of under recoveries of the OMCs and direct subsidies in all the years since 2004-05. The inescapable conclusion…is that there is a negative net subsidy on petroleum products in India. Another way of saying the same thing is that the government extracts a net positive tax revenue from petroleum products in India. The oft-repeated assertion that petroleum products are subsidized in India is simply not true.”
Over the years, the governments in India, both at the state and the central level, have been spending more than they have been earning. Tax revenues from petroleum products remain a major source of income for the governments. While the expenditure of the governments has gone up dramatically, their income clearly hasn’t. And that is what they should be trying to address, instead of trying to tell us time and again that petroleum products are being subsidised. They clearly are not.

 The article originally appeared on www.firstbiz.com on February 5, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

One Response to The Indian consumer does not get any subsidy on petroleum products

  1. Zeny says:

    very interesting

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: