The Justice Srikrishna Committee, which is looking into the feasibility of a separate Telangana State, is expected to submit its report by tomorrow. It might be useful at this point in time to revisit the recommendations of the 1953 States Reorganization Commission (SRC) – the Commission that had first examined the Telangana issue in detail. However, it must be kept in mind that some of those arguments and recommendations may not be applicable today. Background Before independence, Telangana was a part of the Nizam's Hyderabad State and Andhra a part of the erstwhile Madras Province of British India. In 1953, owing to agitation by leaders like Potti Sreeramulu, Telugu-speaking areas were carved out of the Madras Province. This lead to the formation of Andhra Pradesh, the first State formed on the basis of language. Immediately afterward, in 1953, the States Reorganization Commission (SRC) was appointed. SRC was not in favour of an immediate merger of Telangana with Andhra and proposed that a separate State be constituted with a provision for unification after the 1961/ 62 general elections, if a resolution could be passed in the Telangana assembly by 2/3rd majority. However, a 'Gentlemen's agreement' was subsequently signed between the leaders of the two regions and this lead to a merger. The agreement provided for some safeguards for Telangana - for instance, a 'Regional Council' for all round development of Telangana. Thus, a unified Andhra Pradesh was created in 1956. In the years that followed, Telangana continued to see on-and-off protests; major instances of unrest were recorded in 1969 and in the 2000s. The SRC 1953 report The full SRC report can be accessed here. Summarized below are its main arguments and recommendations related to Telangana. Arguments in favour of 'Vishalandhra'
Arguments in favour of a separate Telangana State
SRC recommendations The Commission agreed that there were significant advantages in the formation of 'Vishalandhra'. However, it noted that while opinion in Andhra was overwhelmingly in favour of a larger unit, public opinion in Telangana had still to crystallize. Even though Andhra leaders were willing to provide guarantees ensuring development focus on Telangana, the SRC felt that any guarantee, short of Central Government supervision, could not be effective. In addition, it noted that Andhra, being a relatively new State, was still in the midst of developing policies related to issues like land reform. Thus, a hurried merger could likely create administrative difficulties both for both units. The SRC thus recommended the creation of a separate Telangana State with provision for unification after the 1961/62 general elections.
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
