March is usually a busy month and we all usually are busy in the hustle bustle of year end, appraisals, our investments & what not. But this March brought a news which made me think. What was the news?
*The private players in the petroleum Retail business were shutting down their shops.
Who falls in the purview?
Companies like Shell, RIL & Essar.
The next logical question is why are they closing down the business?
To know the answer we need to go into flashback. Petroleum product prices in India were controlled by APM i.e. Administered Price Mechanism. If we have to define APM in a layman’s language then it would mean, that the prices of diesel & petrol will be decided by the government. This was the very reason that no private sector company was in to retailing of Petrol & Diesel. The market was owned by PSU’s.
However starting from April 2002, APM was officially dismantled.
What were its implications?
The dismantling meant that the prices were to be based on Import Parity(A price charged for a domestically produced good that is set equal to the domestic price of an equivalent imported good - thus the world price plus transport cost plus tariff.)
What does this translate to for Oil Companies?
They were free to respond to international price changes. With this change of winds private sector companies like Reliance, Essar & Shell decided to foray into Retailing of petrol & diesel.
It was in 2004, that the private companies actually started retailing & with their sheer professionalism captured the 15% market share in no time.
Then what happened that they are closing down?
APM though was dismantled but the product is such that the government couldn’t give up complete control on it & despite surging crude prices the prices of Petrol & diesel were not increased in same proportions. This meant huge losses for companies retailing them. This was taken care by the government by issuing Oil bonds(though, even that is not sufficient for PSU’s, they too are incurring huge losses) to PSU’s. Private companies were however not compensated anyways. This led to a differential pricing by private players & in Feb this year they were selling fuel at higher price, the differential ranging between Rs.5 to Rs. 11. And this ultimately mean to two things
How does it make a difference to a consumer, we will still be getting fuels at PSU outlets
It does make a difference, how?
- If you would have noticed, before the entry of Private players the PSU retail outlets having a monopoly used to sell the way they wanted to. This means, lack of quality in products & Service level.
However the private players were successful in raising the bar of service level in this sector and PSU’s soon followed the same.
And guess in this it was us customers who have benefited.
- Closing down of pump means un-employment of several people.
But wait, you must be thinking what am I trying to say in this write up?
Well my answer to both the questions is, No. What we need is a long term soultion
The situation is not as simple as it looks & solution is not as easy too….
Let’s talk about some facts.
- Rising global crude oil prices alone are not responsible for the high price of petrol & diesel today. **Taxes and duties account for over half of the dear price we pay for petrol and a third of the price of diesel in the country.
In India, the taxes & duties are higher than developed countries. 57% of petrol prices are made up duties & taxes & in case of diesel its 33%. This is just 27% & 29% in case of US. In Japan the prices are made up 45% & 33%, Pakistan 39% & 20%, so on and so forth.
The story doesn’t end here; each state levies a different tax, which on an average varies from 33-18.9% in case of petrol & for diesel it’s anywhere between 34-8.23%. This means there is differential pricing amongst states.
I seriously would like to know that why are we paying such high taxes & can it not be reduced? Who is really benefitting from these Taxes? I tried finding answers foe these questiosn but couldn’t
What is the solution?
The easiest solution which is visible to me is that, the government should gradually phase out subsidies being extended to sectors like food, fertilizer and petroleum and, on the other hand it should also rationalize taxes on the petroleum products in the overall national interests. At least their should be a uniform VAT of 8 percent on petroleum products particularly for diesel and petrol so that oil companies are given some respite from higher crude oil prices internationally & it reduces the burden on common people too.
At the cost of sounding amateurish(which I am), I think most of you will agree with me that in our life time its only once or twice we have seen the prices of Petrol & Diesel being reduced. I mean when Crude prices increase the prices are increased why not the other way round?
In our country politics plays the major part in any such major decisions. But at the end of the day it’s the customers who pay the price.
We pay the tax & it is us who are paying for the inflation & ever increasing prices. Today I was watching a news item on NDTV 24X7 which showed that it’s the orphanage’s who have been badly hit by the ever increasing prices(they are now no more serving vegetables to the kids).
It is us who pay for the fuel but it is us who suffer. How? Adulterated fuel, misbehavior by staff etc etc.
The government’s coffers are being filled with our hard earned money but still we end up being the biggest looser.
There is no clear cut solution for this issue. But it is high time that some solution is found so that it benefits everyone, be it PSU’s, private players, government & most importantly the Public i.e. Us. A solution needs to be worked out….with increasing purchasing power we all dream of our own car but, though buying the dream is easy maintaining & running it getting tougher & tougher.
*I know the write up, looks kind of incomplete. Blame my limited knowledge on the subject. But I wanted to write this one because, it is an issue which needs to be discussed & it’s an issue about which I want to know more. And therefore I request everyone here to discuss this very relevant issue. I hope the long pending Pandora’s box is opened;)
~Trivia~
*Today evening have read an article which has the interview of IOC head, who says that the present scenario is not worth thriving and if the pricing scenario continues they might follow the suite & close down their pumps too. The other relevant info is that the Oil Bonds issued to PSU’s can not be reimbursed till 2028