PM advocates further deregulation of fuel prices

Discussion in 'Economy & Infrastructure' started by nrj, Nov 5, 2011.

  1. nrj

    nrj Stars and Ambassadors Stars and Ambassadors

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    Prime Minister Manmohan Singh on Friday hinted at tough fiscal measures, including possible deregulation of fuel prices, cut in subsidies and divestment, but cautioned that this could be done only if it was politically feasible.

    The prime minister was speaking with the Indian media on Friday at the end of the two-day G20 Summit in the French tourist Riviera of Cannes.


    Reiterating that he has always been an advocate of fiscal consolidation, he said that we must not live beyond our means as money simply does not grow on trees. He also added that government expenditure must also be curbed.


    "We must thus seriously try to cut the fiscal deficit down to 4.6 per cent and bring the fiscal system back in balance, consistent with availability of resources."


    The prime minister's comments assume significance in the context of stiff opposition to the hike in petrol prices under the deregulated system.

    The prices of diesel, LPG and kerosene are still administered by the government and are not deregulated yet. Replying to a question on inflation, Singh said food inflation is a problem.

    While the food grains prices are relatively stable, the problem was with the secondary and tertiary food items like vegetables, egg and fish.

    This, he said, was a reflection of demand exceeding supply and was also a sign of increasing prosperity.
    Singh said while analysing food inflation the increase in the net income by 8 per cent per annum and the population increase by 1.6 per cent should not be lost sight of.

    Deregulation and decontrol is the direction India should move in, the prime minister said, adding that these (hike in petrol prices, for example) are sensitive areas and "we must allow markets to find their own level."

    However, he emphasised that the direction of change is clear: India needs to move towards decontrol.

    PM advocates further deregulation of fuel prices - Rediff.com Business
     
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  3. sob

    sob Moderator Moderator

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    Decontrol is good Mr.PM but with persistent high inflation coupled with slowing down of growth rate and looming fiscal imbalance, the economy is in troubled waters and needs deft hands at the steering.


    It takes two to tango.
     
  4. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    This is a very hard decision but a brave one. We spend $40 billion on subsidies and concession of which fuel subsidies is the biggest chunk. This will cut the GoI budget freeing resources and cutting the deficit. Moreover, the consumers will be forces to go for more efficient means of transport and cars e.t.c.
     
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  5. Yusuf

    Yusuf GUARDIAN Administrator

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    Deregulate the fuel prices but pleeeeeease regulate the taxes on it Mr Prime Minister.
     
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  6. Galaxy

    Galaxy Elite Member Elite Member

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  7. SHASH2K2

    SHASH2K2 New Member

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    Brave Indeeed when communist ccp regime provide petrol at rs 46 per litre here in india we pay 30 rs extra. now we need to pay even more. Bravery is only word for actions of such government and bunch of enuchs and chvtiyas for people like us in the society who still vote for them
     
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  8. Yusuf

    Yusuf GUARDIAN Administrator

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    You know what, India should deregulate fuel prices and then also regulate taxes within reasonable means. What this will do is get major oil retailers into the market who will get a level playing field and introduce competition. Reliance failed in the retail business of fuel because it did not get subsidies from the government. Shell too is struggling. But then if Indian oil marketing companies are not given any subsidies and also if tax is something like 20% overall, no excise, no VAT etc and revenue sharing model is developed between central and state govt, then it will reduce the burden on aam aadmi. Competition will make sure no one takes customers for a ride.
     
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  9. Galaxy

    Galaxy Elite Member Elite Member

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    IMO, Deregulation of the fuel prices is must. Although very tough decision due to political reasons. I will be glad if that decision is taken. Having said that, There must be some other steps to make inflation specially food inflation down. Interest rate is near to peak and most likely Crude will trade around these level due to speculative money is out after Q3 earnings, so most likely Inflation will come down in FY12-13 which will translate GDP growth nominal around 14%15% with 6%-7% average inflation.
     
    Last edited: Nov 5, 2011
  10. SHASH2K2

    SHASH2K2 New Member

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    if something is must then it is removal of absurd taxes on petroleum products by central and various stste governments. Inflation will be automatically undercheck . public is fol and doesnt realize that this government gives 30 rs worth subsidy and steal 100 bucks in the name of taxes.
     
  11. Galaxy

    Galaxy Elite Member Elite Member

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    Industries are feeling pressure due to high input cost and interest rate. Most likely, both will come down in FY12-13.

    The Chinese Yuan has appreciated by around 6% over the last one year and the INR has fallen by 10% thus providing an incremental competitive advantage of 16%, which is quite huge. Going forward, Yuan will further strengthen it's appreciation. Indian manufacturers across the board have a great opportunity to take away some market share from Chinese exporters. However policy support from the government in terms of ease of operations, better infrastructure and reduction in red tapisim will be needed over period of time.

    Trade deficit is fine but current account and Fiscal deficit is really big concern. India’s road to fiscal ruin If we manage to control current account deficit around 2.5%, soften Inflation around 6%-7% then our economy will be more stable with less risk.
     
  12. Galaxy

    Galaxy Elite Member Elite Member

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    Fuel prices are not going vertically upward due to global price fluctuation. It's going upward due to 4 primary reasons as per me 1) Dollar appreciation 2) Government failed polices 3) loss of Oil marketing company 4) Fiscal deficit (more expenditure).

    IMO, Best solution is to make effective tax policy, Deregulate Fuel prices and Soften Interest rate and stop black-market of food items which will lead to soften the Inflation. So, Input cost will decrease and PAT will increase for companies and industries across spectrum which will translate 20% more revenue and export and so GDP growth and fiscal deficit. :)
     
  13. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    Look at the irony.

    UPA forms the government in may ’04. Government completely forgets there is term called economic reforms, and they sleep over it to this day.

    Why are the reforms important, because it gives much needed space to economic activity, which increases the pace of economic growth to all cross sections of society. When the economic activity increases the government is way better funded through revenue generation using various means.

    What did the government instead do? Burden the state exchequer with more of their social programs, loan waivers, subsidies, etc.

    To meet this ever growing expenditure they never thought of meeting it through other means like increasing the tax base, cutting down on subsidies of some if they are increasing elsewhere, taking effective measures of getting home the black money, curtail the corruption, on the contrary they are perceived to be the most corrupt government ever, let alone the economic reforms that I just mentioned, etc.

    How does the government fund all these lavish expenditures, either flog the middle class like you and I or take loans/grands/aid and today we are at a stage where the central government’s public debt is at a staggering 72% of gdp!!!

    What does all this lead to? Fiscal deficit. This fiscal the central government figure is already at an astronomical 8%, now you know why the sudden urge on part of the government to deregularize the price of petroleum products?

    How will the government fill up the gap, the easiest way of all is by taxing more the 3-4crore people who anyway pay their taxes, imagine India’s supposed middle class is 300-400million, with 850million mobile phone users, one wonders what happened to all those other people?

    Petrol is sold at a profit, will the prices come down after complete deregulation? Last I checked the prices were up by rs1.85, imagine the deregulation we are headed to! Will the PM also deregularize the price of kerosene? Will he then do a deregularization across the board and let the market decide the price? Will this deregularization then also include things like urea?

    This has been the most inefficient government that one has seen. Well done mr PM, you were supposed to be some economist one thought. Indeed one!
     
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  14. SHASH2K2

    SHASH2K2 New Member

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    [​IMG]
     
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  15. SHASH2K2

    SHASH2K2 New Member

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    Last edited: Nov 6, 2011
  16. SHASH2K2

    SHASH2K2 New Member

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    [h=1]Mamata Banerjee is a compulsive populist, says UPA minister[/h]
    NEW DELHI: Unfazed by the hue and cry raised by its ally Trinamool Congress and the Opposition, the government on Saturday dug in its heels by ruling out any rollback in the petrol price hike and hit back at Mamata Banerjee and BJP by describing their opposition to the decision as "political hypocrisy".

    A senior minister who is part of the Cabinet's group on fuels shrugged off the Bengal CM's pull-out threat, terming it a manifestation of her "compulsive populism". "She was a member of the group of ministers that freed petrol pricing from government control in June, 2010. As is her wont, she did not attend the meeting but her consent was taken. She continued in the Cabinet even after that. She didn't threaten the government then. With allies like them, the UPA does not need the Opposition," the minister said, insisting on anonymity. He said that the government was compelled to allow oil companies to raise prices because of their precarious financial health due to a "double whammy" of rising crude prices and weakening of the rupee.

    'Oil prices and dollar value not in our control'

    It is not that the government is running for a Nobel for unpopularity. It does unpopular things only when it becomes inevitable," a UPA minister told TOI defending the rise in fuel prices. "Oil's price and the dollar's value are not in our control. Who would have thought that the US economy would shrink but dollar and oil would become stronger? How much politics can you accommodate?" he said on condition of anonymity.

    However, the minister conceded that given the political heat generated over petrol, it would be difficult for the government to raise diesel, cooking gas and kerosene prices anytime soon. The government directly controls the price of these fuels and the ministerial panel on fuels was expected to meet shortly for taking a call on raising their prices.

    Reacting to BJP's description of the petrol price hike as "midnight deceit", the minister said that party's government in seven states was indulging in "daytime robbery" by taxing petrol heavily. "Even Mamata's government charges 26% tax against 20% levied by Delhi government. The Centre has sacrificed customs on crude and excise on petrol. If they are so concerned, why can't they reduce their VAT? If the price is going up, they are benefiting."

    He said people needed to understand that the oil companies are expected to lose Rs 132,000 crore because of keeping prices low even when oil and dollar prices are rising. "Despite Rs 15,000 crore dole, the oil companies have posting losses. Overall, the government may take on Rs 50,000crore-Rs60,000-crore burden. Where will this come from... maybe from tax on people? Even then, who will pay for the rest? If the FM were to subsidize the whole (losses), the fiscal deficit target will be exceeded and India's sovereign rating will be downgraded. That will be catastrophic."
     
  17. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    Not sure where the Chinese Communist Party came into the picture espicially since they are not even in power in WB now.

    On the taxation side of things. Approximately half of what we pay per liter is taxes. Here is a really good paper on the taxation and fuel subsidies in India by the IEA. http://www.iea.org/papers/2009/petroleum_pricing.pdf

    For those who don't have the time. The main points are:
    (1) The Centre has a fixed taxation system where around Rs14.5 per litre is charged as part of central taxes. About 1/3 of this is then given to the states while 2/3 is retained by the centre. In otherwords, even if the price of petrol increases, the tax / litre will remain the same.
    (2) The states charge a percentage of the price which is aroun 25%. So as the price increases, so does the tax you pay to the state. This is on top of the Rs5 / litre fixed tax
    (3) In percentage terms for a Rs 70/liter price. You are paying about 16% to the centre and 33% to the state as taxes bringing it to a total of 49%. In this scenario, its the states that can make the biggest difference by cutting down on taxes or atleast moving to a fixed price like the centre so that the tax we pay does not increase with a hike in price.

    These are all rough back of the envelope calculations but more or less accurate.
     
  18. Yusuf

    Yusuf GUARDIAN Administrator

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    I think a fixed Rs 20 per ltr as tax should be charged with the state and center working out a revenue sharing mechanism. That will enable a 20 rupees drop in petrol prices. You can then free up LPG subsidy and also fix a tax on LPG too. Ditto for diesel, kerosene as well.
     
  19. JayATL

    JayATL Senior Member Senior Member

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    IMO - DEREGULATION OF GAS PRICES IS BAD!

    REGULATED Prices is better- IF and ONLY IF
    , you can take away the poltics of vote bank from it. I suspect MMS is fed up with the political gamemanship of it...

    Here in the US due to de regulation the oil companies have different prices in every state ( example: CA is amost 1.5 X of price in Georgia)

    When the price of a barrel oil goes up, say from $100 to $125.... in the futures market. The oil companies raise prices before they even have to pay $125 for it. so they bought it for $100 bucks and yet charge you like the bought for $125

    Regulated market as long as public does not fall for vote bank will keep prices down.
     
    Last edited: Nov 6, 2011
  20. SHASH2K2

    SHASH2K2 New Member

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    I mentioned China as they are least bothered about public appeasement and for them economic development is number one priority . Even they know that petroleum products price shouldnt be so high that everything else is becoming costlier. If you check post 14 you data you will come to know host costly petrol is in India . I know that states taxes also contribute a lot to petroleum prices. center should do its part of trying to bring down the prices and leave it to the people to settle with states. day center become proactive states would be forced to follow their footsteps .
     
  21. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

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    Well just working from a the Rs 70 / liter example and the retail price with no subsidy and no taxes at Rs 45 / litre which is approximately the situation today in most parts of India. We are paying about Rs35/litre in taxes and receiving a Rs 10 / litre as subsidy from the center. The subsidy is not very transparent and clear as the Centre uses oil bonds, direct cash infusions as well as forces state-owned oil companies to directly bear the losses.

    Out of the Rs 35 in taxes, the percentage based taxation allows states to collect about Rs24 / liter while the Center gets around Rs 11/litre after returning the state share of the 1/3 of fixed Rs14.50 Central excise duty.

    Also note that when there is a price hike, the centre does not get any extra tax revenues. While the states do get a percentage increase with every hike. AP for examples charges 33% VAT and the price increase will include a 33% tax increase that will go to AP state revenues.

    What we really need is a flat 10% GST across the board with the centre and state sharing the revenues and no other taxes. But also the ability to add environmental tax or carbon tax later on when needed to discourage fossil fuel use and encourage fuel efficient cars.

    So in short the Centre moved to a fixed price mechanism and cut down its taxes on fuels in the 2005-2008 period and moved to a fixed pricing mechanism in 2008. Now its difficult for the Centre to cut down on taxes even further as they have already done their bit. Its about time that the States chip in and cut their taxes as well and move to a fixed price mechanism like the Centre. And this includes Congress ruled states like AP which has the highest VAT on petrol in India.

    If you look at the graph on revenues below, you can see how post 2008 after the UPA-1 tax cuts on petrol, the state share of revenue has increased while the center has decreased despite an increase in petrol prices.Thsi is only till 2009 but state revenue has grown much more since then due to the percentage based taxation.
    [​IMG]

    Now all this would make sense from the economics side of things. But from the political side, its unsavory to mainly the middle and upper middle classes who use petrol. The LPG and Kerosene prices will be rarely touched because that affects the poor more directly and who are a much bigger vote "bank" than the middle classes even though the TV channels tend to cater for them rather than the poor.

    Although eventually I would prefer the UID scheme were LPG, Kerosene, Diesel all are decontrolled and the poor get a direct cash transfer as part of the PDS system right and the end user level. This will cut out the middle men and also root out corruption. For example, many restaurants use subsidies ed LPG by paying of poor families who sell their cylinders for cash. Similarly, diesel which was to be used mainly farmers is now being used by private cars and SUVs.
    So the sooner the UID scheme and cash transfer system starts the better for all of us.
     
    Last edited: Nov 6, 2011
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