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

The Election Commission has announced the schedule for the election of the President of India.  The last date for nominations is June 30, elections will be held on July 19, and counting will take place on July 22.  The BJD and AIADMK have proposed the name of Mr. P.A. Sangma.  The Samajwadi Party and Trinamool Congress have suggested three names.  Other parties or alliances have not announced any contenders.  Our calculations show that no single party or alliance has the numbers to unilaterally elect candidates of its choice. A candidate will need 5,48,507 votes to be elected as the President.  If the UPA were to vote as a consolidated block, its vote tally would reach 4,49,847 (41% of the total votes).  Among the Congress allies, Trinamool holds the largest number of votes (47,898). If Trinamool decides to support some other candidate, the UPA tally will fall to 4,01,949 votes (37% of the total). The votes held by the major alliances are given in the table below:

Coalition Value of votes Percentage of total votes
UPA

4,49,847

41.0%

NDA

3,03,912

27.7%

Left

52,282

4.8%

Bahujan Samaj Party

43,723

4.0%

Samajwadi Party

68,943

6.3%

Biju Janata Dal

30,215

2.8%

AIADMK

36,216

3.3%

Others

1,11,874

10.2%

Total

10,97,012

 
Minimum required to be elected

5,48,507

 

  A detailed break-up of votes held by each party is given in the table below:

Party Value of votes Percentage of total votes
Indian National Congress

3,31,855

30.30%

Bharatiya Janata Party

2,32,454

21.20%

Samajwadi Party

68,943

6.30%

All India Trinamool Congress

47,898

4.40%

Bahujan Samaj Party

43,723

4.00%

Janata Dal (United)

41,574

3.80%

All India Anna Dravida Munnetra Kazhagam (AIADMK)

36,216

3.30%

Communist Party of India (Marxist)

35,734

3.30%

Biju Janata Dal

30,215

2.80%

Nationalist Congress Party

24,058

2.20%

Independent

23,830

2.20%

Dravida Munnetra Kazhagam (DMK)

21,780

2.00%

Telugu Desam Party

21,256

1.90%

Shiv Sena

18,320

1.70%

Shiromani Akali Dal

11,564

1.10%

Communist Party of India

9,758

0.90%

Rashtriya Janata Dal

8,816

0.80%

Others

7,420

0.70%

Janata Dal (Secular)

6,138

0.60%

Jammu and Kashmir National Conference

5,556

0.50%

Rashtriya Lok Dal

5,412

0.50%

Desiya Murpokku Dravida Kazhaga (DMDK)

5,104

0.50%

Jharkhand Mukti Morcha

4,584

0.40%

Muslim League Kerala State Committee

4,456

0.40%

Indian National Lok Dal

4,068

0.40%

All India Forward Bloc

3,961

0.40%

Jharkhand Vikas Morcha

3,352

0.30%

Asom Gana Parishad

3,284

0.30%

Telangana Rashtra Samiti

3,044

0.30%

Revolutionary Socialist Party

2,829

0.30%

Bodoland People's Front

2,808

0.30%

All India United Democratic Front

2,796

0.30%

Praja Rajyam Party

2,664

0.20%

Maharashtra Navnirman Sena

2,275

0.20%

Kerala Congress (M)

2,076

0.20%

All India Majlis-e-Ittehadul Muslimeen

1,744

0.20%

Nagaland People's Front

1,722

0.20%

Sikkim Democratic Front

1,640

0.10%

Peoples Democratic Party

1,512

0.10%

Bahujan Vikas Aaghadi

1,058

0.10%

Lok Janasakti Party

957

0.10%

All Jharkhand Students Union

880

0.10%

Haryana Janhit Congress

820

0.10%

Mizo National Front

732

0.10%

Marumalarchi Dravida Munnetra Kazhagam

708

0.10%

Swabhimani Paksha

708

0.10%

Viduthalai Chiruthaigal Katchi

708

0.10%

YSR Congress Party

708

0.10%

Peasants and Workers Party

700

0.10%

Pattali Makkal Katchi

528

0.00%

Manithaneya Makkal Katch

352

0.00%

Puthiya Tamilaga

352

0.00%

All India NR Congress

240

0.00%

J&K National Panthers Party

216

0.00%

Communist Party of India (Marxist-Leninist)

176

0.00%

United Democratic Party

153

0.00%

Lok Satta Party

148

0.00%

Loktantrik Samajwadi Party

129

0.00%

J&K Democratic Party Nationalist

72

0.00%

People's Democratic Front

72

0.00%

Uttarakhand Kranti Dal

64

0.00%

Maharashtrawadi Gomantak Party

60

0.00%

People's Party of Arunachal

32

0.00%

Total

10,97,012

 

Notes: The electoral  college for the Presidential election consists of the elected members of Lok Sabha, Rajya Sabha and all Legislative Assemblies. The winning candidate must secure at least 50% of the total value of votes polled.  Each MP/ MLA’s vote has a pre-determined value based on the population they represent. For instance, an MP’s vote has a value of 708, an MLA from UP has a vote value of 208 and an MLA from Sikkim has a vote value of 7 (Note that all MPs, irrespective of the constituency or State they represent, have equal vote value). Parties in various coalitions: UPA: Congress, Trinamool, DMK, NCP,Rashtriya Lok Dal, J&K National Conference, Muslim League Kerala State Committee, Kerala Congress (M), All India Majlis-e-Ittehadul Muslimeen, Sikkim Democratic Front, Praja Rajyam Party, Viduthalai Chiruthaigal Katchi NDA: BJP, JD(U), Shiv Sena, Shiromani Akali Dal, Janata Party Left: CPI(M), CPI, Revolutionary Socialist Party, All India Forward Bloc