Raj's Lab

Strategy and Entrepreneurship

Petrol Price – Virtual Reality?

1 Comment

As any other normal citizen living in India I was pretty much surprised by the announced spike in the petrol price.  While there are many opinions on why the price hike may be justified, there are an equal number of opinions on why it should not be imposed.  While I do not wish to add to the existing plethora of opinions, one thing that I wish to share is the thoughts that came to me when I was ruminating over the price hike.

Oil marketing companies and oil prices  From whatever little public information I have access to and related conversations that I have overheard, there is one standard complaint from oil marketing companies in India, that they are being forced to bear loses in the process of delivering oil. But these fundamental questions are yet to answered:

  • Are these so called Public Sector Undertaking (PSU), in the oil marketing space truly looking at enabling the country receive oil at the lowest cost? Should this be their priority?
  •  As a Public Sector Undertaking do they consciously keep their organizational cost at the minimum, considering the fact that all PSUs have been created to serve the nation? To my understanding these salaries and related costs of an oil marketing company are fairly high in comparison with the average economic earning potential in the country

Who pays for the oil? I have always been astonished by the fact that people fight over (especially political parties) price fluctuations in oil. They also voice their opinions for increased subsidies by the government. These questions however are comfortably ignored in this milieu :

  • Who uses petrol the maximum?  While diesel costs should directly affect the commodity prices, even petrol costs seem to be inflating basic commodity prices (vegetables / fruits etc) without any rational.  While much of the petrol is used for cars and two wheelers – the reason quoted by most people fighting against price increase is the impact on the poor people and public transport.
  • Most of the public transport systems across cities and towns run on diesel or LPG. Why should petrol prices then impact them directly?

Subsidies:  Subsidies to my limited understanding are provided for  temporary periods of time so as to enable one who cannot buy make the purchase or enable the producers to get an unfair advantage. If subsidies are continued for too long they become a habit.  But what are subsidies in reality? They are actually alternatives funded by the government using the income received which is primarily taxes.  The government faces the two key challenges:

  1. Trying to bring more people into the tax bracket
  2. Making best use of the income in providing for the entire country.

Because of governance issues and general reduction in value system, instead of more people becoming a part of the tax bracket, the existing people end up being taxed more.

Considering the complexities of economic policies, this boils down to the fact that we are constantly trying to outsmart our own previous smartness. The situation demands some fundamental revolutionary shift in economic policy making, enhanced governance practices and conscious service focus by PSUs – till which only opinions will rule.

 

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One thought on “Petrol Price – Virtual Reality?

  1. Dear Raj,
    The whole fuel pricing thing is a farce and a mockery.

    How can these ‘so called’ loss making enterprises hire Dhoni, Narain Karthikeyan and the like to sponsor for their brands? Does it even make sense to prefer BP over HP or so on? IIRC, IOC filed 16,000 Cr of PROFIT loss year. (or if it is the previous year) – Thats a lot of profit for a public company.

    Shell for e.g., operates without subsidies. Right now, both Shell and govt owned fuel stations sell at almost the same price in Bangalore (about Rs 81) – How is it even possible that Shell that sells at market price is able to sell at the same price as hugely subsidized, loss making enterprise? The answer is that Govt receives over 40% of the price of the fuel back as tax and uses that to subsidize.

    On the other hand, these oil companies (IOC, HP, BP – why do we even need 3 of them?) require funds for oil exploration, setting up more plants and refineries. So, it is ok if they make a profit. But, at least I want the Govt to be transparent and let everyone know what’s happening.

    Let them remove damned subsidies and HUGE taxes (replace them with nominal ones) so that this farce of subsidizing the loss making companies drama stops. Everyone can use some transparency here.

    And when some of these companies launch a new ad blitz with Dhoni, I hope someone lands a punch in the face of the company representatives who claim the company runs to crores of loss for every hour of its existence.

    If at all something needs to be subsidized, let them support subsidizing of LPG and Kerosene to a reasonable limit per family (below a certain income threshold). After all some socialism is not bad (good Karma)

    Sorry for venting :)

    Regards
    Sriram

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