What is the real cost of petrol in India?
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What is the real cost of petrol in India?


Commit and rollback – a pretty easy operation in a database world but not so easy in the real world. India has taken steps to de-regularize the petrol prices and increase diesel prices. In effect petrol and diesel prices are raised by 3 rupees and 2 rupees respectively. Kerosene was increased by 3 rupees per liter and the Liquefied Petroleum Gas(LPG) rate is increased by 35 rupees per cylinder. This is done by the ruling Congress party. This did not go well with the opposition parties in all states and as with most cases in India, they are organizing a country-wide strike. The cost of today’s strike is estimated to be 10,000 crore rupees ($2.14 billion).

Even after the hike in the four sensitive petroleum products, government of India still has to under recover 53,000 crore rupees or $11.3 billion. At current international prices the under recoveries of the oil marketing companies would translate to Rs.17.92 per litre on Kerosene, Rs.261.90 per cylinder on Domestic LPG and Rs. 1.5 per liter for diesel.

When compared with India’s neighboring countries, the prices of petrol and diesel are higher but the cost of kerosene and LPG are much lower.

The consumer price of Kerosene in India’s neighboring countries :

  1. Rs.35.97/litre in Pakistan
  2. Rs.29.43/litre in Bangladesh
  3. Rs.21.02/litre in Sri Lanka
  4. Rs.39.24/litre in Nepal.

The consumer price of LPG in India’s neighboring countries :

  1. Rs.577.18/ cylinder in Pakistan
  2. Rs.537.37/ cylinder in Bangladesh
  3. Rs.822.65/ cylinder in Sri Lanka
  4. Rs.782.84/ cylinder in Nepal (source)

Coming to petrol, in April 2010, the cost of a liter petrol in Delhi was 47.93 rupees per liter. But as per the government of India, if it was market determined then it should be 54.61 rupees per liter. Not sure how the figure of 54.61 was arrived at but at 47.93 per liter the actual cost of petrol is 26.34 rupees per liter before all the taxes.

Here is the breakdown of the taxes charged by the government in various forms. From the time it is refined to the time it reaches the consumers.

  1. Excise duty  : 14.35 rupees per liter 
  2. Customs duty : 7.5 percent
  3. Sales tax or VAT  : 20 percent. (PIB)

The total taxes amount to 45 percent of the final cost of the petrol. With a 26.34 rupees per liter of petrol if we add all of the taxes it comes to 47.93 rupees per liter, the cost of petrol in Delhi before the recent hike.

The crude in international market is now at $72.35 per barrel. If barrel is taken to be 158.99 liters then the cost of crude would be some 46 cents which would mean the crude cost is 21 rupees. And the cost of refining crude should be added up to. The cost of refining is hard to find out and looking at the difference it should be around 5.34 rupees per liter of petrol. I somehow find that hard to believe and I thought the cost of refining would be much higher. Crude goes through a lot to become petrol. Crude Distillation Unit (CDU), Vacuum Distillation Unit(VDU), Fluid Catalytic Cracking Unit (FCC), Hydro-cracker, Coker unit, Lube Unit are the several things which crude goes through to become petrol or diesel.

If a barrel of crude oil in International market is $140, as it was in 2008, and if the petrol prices were left to the market fluctuations then the cost of petrol in retail market would be 70 rupees per liter. This was exactly the rate at which Shell sold petrol in 2008. Shell is the lone private retailer along with Reliance. Both Shell and Reliance had shut down many of their shops as they couldn’t compete with the government owned oil marketing companies which were absorbing the shocks.  This has done two things. It kept private sector out of the competition and it has shielded people from price hikes and falls and inherently made them oblivious to the consumption control. 

India’s oil subsidies are 0.4 percent of India’s total budget in 2008. Why go through the convoluted path of shielding consumers from price hikes and falls, absorb that loss from the oil marketing companies and ultimately put that back on India’s national budget which again is coming from the tax money?

There are lot of things which I don’t understand and this petrol diesel mess is on of them. And coming to the strike, what the opposition parties want is the rollback of petrol prices. Not one of them are talking about the ridiculous taxes (close to 50%) on these petroleum products. Shouldn’t they be concerned about the taxes than the price hike? And the cost of today’s strike to nation’s economy is $2bn, who is footing that bill and who is organizing a strike for it?