Petroleum Secretary S Sundareshan, while addressing a press Conference on Friday, announced the government’s decision to deregulate prices of petrol. Petrol prices shall now be subject to periodic revisions based on fluctuations in market prices. An immediate hike of Rs. 3.50 per litre has already been affected. Prices of diesel shall be deregulated in stages while those of kerosene and LPG shall continue to be regulated by the government. For the moment, diesel has been hiked by Rs. 2 per litre, kerosene by Rs. 3 per litre and LPG by Rs. 35 per cylinder. Crude to retail: Pricing and under-recoveries India imports about 80% of its crude oil requirement. Therefore, the cost of petroleum products in India is linked to international prices. The Indian barrel of crude cost $78 in March 2010. Once crude is refined, it is ready for retail. This retail product, is then taxed by the government (both Centre and State) before it is sold to consumers. Taxes are levied primarily for two reasons: to discourage consumption and as a source of revenue. Taxes in India are in line with several developed nations, with the notable exception of the US (See Note 1) Before the current hike, taxes and duties in Delhi accounted for around 48% of the retail price of petrol and 24% of the retail price of diesel. (Click Here for details) Ideally, the retail prices of petroleum products should then be determined as: Retail prices = Cost of production + taxes + profit margins However, in practice, the government indicates the price at which PSU oil companies sell petroleum products. Since these oil companies cannot control the cost of crude (the primary driver of the cost of production) or the taxes, the net result is an effect on their profit margins. In cases where the cost of production and taxes exceeds the prescribed retail price, the profit margins become negative. These negative profit margins are called ‘under-recoveries’. When international crude prices rose above $130 in 2008, under-recoveries reached an all-time high of Rs. 103,292 crore. Even at much lower prices in 2009-10 (averaging at $70 per barrel), under-recoveries totalled Rs. 46,051 crore. (See Note 2) The latest move is an effort to reduce these under-recoveries. The government cited the recommendations of the Kirit Parkih Committee while announcing its decision (Summary - Kirit Parikh Committee report). Any alternatives to price hike? As is evident from above, under-recoveries can also be reduced by decreasing taxes. In fact, one might argue that by both taxing the product and offering a subsidy, the government is complicating the situation. Usually whenever subsidization coexists with taxation, it serves the purpose of redistribution. For example, taxes might be collected universally but subsidy be granted to the weaker sections only. However, this is not the case in the current situation. What needs to be noted here is that these taxes are a very significant source of revenue. In fact, the total taxes paid by the oil sector to the central and state governments were around 3% of GDP in 2008-09 (See Note 3). Reducing taxes now might make it difficult for successive governments to raise taxation rates on petroleum products again. Moreover, though taxes are levied both by the Centre and the States, the subsidy is borne only by the Centre. Hence, the current arrangement is beneficial to the States. Possible future scenarios The opposition has voiced concerns that the hike in prices is likely to lead to even higher inflation and will further burden the consumer. The Chief Economic Advisor to the Finance Ministry, Dr. Kaushik Basu, however, told the media that these changes would have a beneficial effect on the economy. According to him,
"The (decontrol of petrol prices), coupled with price increase for LPG (cooking gas) and kerosene, will have an immediate positive impact on inflation. I expect an increase of 0.9 percentage points in the monthly Wholesale Price Index (WPI) inflation".
However, he added, that since the hike in fuel prices would push down fiscal and revenue deficit,
"they will exert a downward pressure on prices… More importantly, from now on, if there is a global shortage and the international price of crude rises, this signal will be transmitted to the Indian consumer. It will rationalise the way we spend money, the kinds and amount of energy we use, and the cars we manufacture. It is an important step in making India a more efficient, global player”.
It remains to be seen how the actual situation pans out. Notes 1) Share of tax in retail price (%)
| Country | Petrol | Diesel |
| France | 61% | 46% |
| Germany | 63% | 47% |
| Italy | 59% | 43% |
| Spain | 52% | 38% |
| UK | 64% | 57% |
| Japan | 48% | 34% |
| Canada | 32% | 25% |
| USA | 14% | 16% |
| India (Del) | 48% | 24% |
Source: Petroleum Planning and Analysis Cell, PRS (Data as of Feb, 2010) 2) Under-recoveries by oil companies (Rs Crore)
| Year | Petrol | Diesel | PDS Kerosene | Domestic LPG | Total |
| 2004-05 | 150 | 2,154 | 9,480 | 8,362 | 20,146 |
| 2005-06 | 2,723 | 12,647 | 14,384 | 10,246 | 40,000 |
| 2006-07 | 2,027 | 18,776 | 17,883 | 10,701 | 49,387 |
| 2007-08 | 7,332 | 35,166 | 19,102 | 15,523 | 77,123 |
| 2008-09 | 5,181 | 52,286 | 28,225 | 17,600 | 103,292 |
| 2008-09 | 5,151 | 9,279 | 17,364 | 14,257 | 46,051 |
Source: Petroleum Planning and Analysis Cell, PRS 3) Contribution to Central and State taxes by Oil Sector (2008-09)
| Category | Rs (crore) |
| Sales tax | 63,349 |
| Excise duty | 60,875 |
| Corporate tax | 12,031 |
| Customs duty | 6,299 |
| Others (Centre) | 5,093 |
| Other (State) | 4,937 |
| Profit petroleum | 4,710 |
| Dividend | 4,504 |
| Total | 1,61,798 |
Source: Petroleum Planning and Analysis Cell
Yesterday, the BJP announced its candidate for the upcoming election of the President, which is scheduled to be held on July 17. In light of this, we take a look at the manner in which the election to the office of the President is conducted, given his role and relevance in the Constitutional framework.
In his report to the Constituent Assembly, Jawaharlal Nehru had explained, “we did not want to make the President a mere figurehead like the French President. We did not give him any real power but we have made his position one of great authority and dignity.” His comment sums up the role of the President as intended by our Constitution framers. The Constituent Assembly was clear to emphasise that real executive power would be exercised by the government elected directly by citizens. It is for this reason that, in performing his duties, the President functions on the aid and advise of the government.
However, it is also the President who is regarded as the Head of the State, and takes the oath to ‘protect and defend the Constitution and law’ (Article 60 of the Constitution). In order to elect a figure head who would embody the higher ideals and values of the Constitution, the Constituent Assembly decided upon an indirect method for the election of the President.
The President is elected by an Electoral College. While deciding on who would make up the electoral college, the Constituent Assembly had debated several ideas. Dr. B.R Ambedkar noted that the powers of the President extend both to the administration of the centre as well as to that of the states. Hence, in the election of the President, not only should Members of Parliament (MPs) play a part, but Members of the state legislative assemblies (MLAs) should also have a voice. Further, in relation to the centre, some members suggested that the college should comprise only members of the Lok Sabha since they are directly elected by the people. However, others argued that members of Rajya Sabha must be included as well since they are elected by members of directly elected state assemblies. Consequently, the Electoral College comprises all 776 MPs from both houses, and 4120 MLAs from all states. Note that MLCs of states with legislative councils are not part of the Electoral College.
Another aspect that was discussed by the Constituent Assembly was that of the balance of representation between the centre and the states in the Electoral College. The questions of how the votes of MPs and MLAs should be regarded, and if there should be a consideration of weightage of votes were raised. Eventually, it was decided that a ‘system of Proportional Representation’ would be adopted, and voting would be conducted according to the ‘single transferable vote system’.
Under the system of proportional representation, the total weightage of all MLA votes equals the total value of that of the MPs. However, the weightage of the votes of the MLAs varies on the basis of the population of their respective states. For example, the vote of an MLA from Uttar Pradesh would be given higher weightage than the vote of an MLA from a less populous state like Sikkim.
Under the single transferable vote system, every voter has one vote and can mark preferences against contesting candidates. To win the election, candidates need to secure a certain quota of votes. A detailed explanation of how this system plays out is captured in the infographic below.
Sources: Constitution of India; ECI Handbook; PRS.
Coming to the Presidential election to be held next month, the quota of votes required to be secured by the winning candidate is 5,49,452 votes. The distribution of the vote-share of various political parties as per their strength in Parliament and state assemblies looks like this:
Note that the last date for filing nominations is June 28th. In the next few days, political parties will be working across party lines to build consensus and secure the required votes for their projected candidates.
[The infographic on the process of elections was created by Jagriti Arora, currently an Intern at PRS.]
