Everybody seems to be shaken up with the rise in kerosene, diesel and LPG prices and how it is going to impact the family budget. Was it required or not? Did government had any other option or they were economically tied up? Opposition parties have sensed this as a political issue that can swing votes in their favor. They have untied and talking about BHARAT BAND etc. Overall a common man feels that he is being cheated.
Subsidy on fuel price
Last year Govt Deregulated the price of petrol – so price is linked to international prices and same is charged to us. But in case of other petroleum products government pay the difference of what were the international prices and what was charged to us, by way of subsidy. For example, if the prices of diesel according to international prices is Rs. 50/- per liter but Rs.40 was charged to end user from filling station the difference of Rs. 10/- per liter is paid by Government through subsidy. Now this Rs. 10 becomes rupees in lakh of crore when it comes to the entire consumption in India. Now to subsidize, government have to either rise taxes or print notes. Printing notes leads to higher inflation and raising tax leaves us poor. So, either way we were charged, either directly or indirectly. Last time when these prices was hiked international crude price per barrel was $72 & currently it is $107 – 50% more. Govt is not having any choice but to hike the price.
But Govt charges so much tax on fuel
The notable point is that the prices of the petrol or diesel also carries the load of huge custom and excise duty. Government has tried to reduce it but still under recoveries for oil company are above 1 lakh crore. If government were to control their unnecessary expenses and expense that go waste, the price can come down drastically as the taxation shall come down. (have I wrote corruption)
Government Financial Health
Now, imagine a listed company you are analyzing for potential investment. Its profit & Loss shows it spends more than what it earns. To fund this gap it raises debt every year. Will you invest in such company? We are talking about India as that company & investors are FDI, FII & people who trade with us. In economics it’s called the Fiscal Deficit. A fiscal deficit occurs when government spends more money than it collects in from of revenue. India’s Fiscal deficit target was 6.7% of GDP in FY 10 but they managed at 6.4% as they reduced spending on rural areas. You can check fiscal deficit figures in below table. In last table of duty cuts you can see government will loss Rs 49000 crore – which may turn into .5% extra fiscal deficit if we are not able to find any other revenue source. Pranab Mukherjee said “I have taken the risk of reducing the duties so that relief can be given to consumers”.
Economics Vs Politics on Fuel prices
“I am sandwiched between economists on one side and populists on the other. Political problems will always be there and economic problems don’t wait for solutions of so-called political crisis.” Oil Minister S Jaipal Reddy. I think that charging us directly is much better way than being charged indirectly by way of subsidy and then raising taxes or printing notes. In fact, mechanism of linking to international prices should have been in place much earlier but due to political reasons, such decisions were never taken and therefore delayed. The economic sense is kept on back burner and politics took the front seat – Diesel, kerosene and LPG are still heavily subsidized. Now, when the government really could not afford to further carry on subsidy mode – the market should determine what should be the prices. The only thing is that timing of such decision is not appropriate in our view as public is anyway under tremendous pressure of rise in prices. It would have been a great if the same could be done when the inflation was 5-6%. [Government keep saying that we have to import 80% of the petro products – true we agree but are you using other natural resources in most efficient manner. India in world no.1 source in Iron ore but we are waiting it. ]
The matter would be hot for some time and there will be lost of debates but soon people will forget and get used to paying the increased prices. Also check what are neighbors are paying.
Inflation in India
Please understand that Inflation in India will remain high as it is a developing nation and demand of goods and services is much higher than the supply side. Due to this demand and supply mismatch, the prices will keep going up. When it comes to investing, our aim should be to beat the inflation by a margin. Now, the major concern is that people invest their savings which give them return less than that of inflation rate. Current inflation rate(Chart) is above 9%. This rise in current fuel prices can add another.5% to inflation. Check Historical graph of inflation in India. (since January 1969)
Inflation & your Investments
Now look at where most of our investments are lying. Indians have more than 60% of their saving in Bank Deposits or Post Office or they ENDOWMENT or MONEY BACK policies which give even lesser return than FD. The return on fixed Deposit Currently is less than 9% and if we subtract taxation liability to it, then the net return is even less. Does our investment really keep track with the rate of inflation? Is Our investment leaving us poor at the time of maturity? We need to think about all this before we actually invest.Credit: Few tables used in the article are taken from Business Standard.
Mind you, it is not where you stand that matters,
but in what direction you are moving that matters the most!
Please share what do you feel about Fuel Price Hike Now.