Of the various sensitive issues that can make or break a government in India, petrol pricing is one. As on 10 Dec '12, petrol price in India is R72.3 (Average price of Metros). If we take Delhi as a base, it has fluctuated 30 times over the past 4 years causing an increase by 47%.1 On May 23, 2012 petrol saw its steepest hike ever- by R7.54 leading to nationwide protests by the opposition and the general public. Protesters in the states of Andhra Pradesh, Bihar, Odisha, Jammu and Kerala burnt effigies of Prime Minister Manmohan Singh, set motorcycles on fire and held placards reading "Bring down petrol prices".2
Impact on Inflation
Petrol prices account for 1.09% of overall WPI (Wholesale Price Index). Implying that an 11.5% increase (due to the hike of R7.54 recently) increases the inflation by 13-15 bps.3
Inflation, as we know, reduces the purchasing power of the Rupee and effectively makes people poorer. In a country where 77 per cent of the population spend 60-80 per cent of their meager R600 monthly income on food (according to the report of the National Commission for Enterprises in the Unorganised Sector), the price of petrol is out of reach of the poorer majority who cannot afford the costs of private transport.
Impact on Transportation
There are 10 crore two wheelers and 2 crore cars, of which 60%, i.e. 1.2 crore cars run on petrol, affecting about 11.2 crore vehicles in all.4 5 6 7 8 The population affected would be even higher if we assume each vehicle is used by a family of four on average.
To understand the cause of the hike, let us first understand price breakup of petrol.
In any industry, the selling price of a product is determined by adding a profit margin to the cost of production. However, the oil industry in India is unique, in that, the actual cost of production has no bearing on the ultimate selling price. That is because the selling price of petrol is determined by a principle called 'import parity pricing'. According to it, the landed cost of importing petrol at the international retail price (Singapore Spot Market in this case) is taken as the benchmark. Landed cost comprises the average fortnightly Singapore market price of petrol plus Ocean freight, Customs Duty, Insurance, Ocean Loss, etc. However, India does not import petrol (except in ignorable quantities). It imports crude oil and refines it to obtain the end products such as petrol, diesel, etc. 100 percent of the refining is done in domestic refineries. Hence, the import parity price contains notional and imaginary costs that the country doesn't actually incur.
The logic given for import parity pricing is, had it not been for domestic refineries, India had to import petrol refined in other countries which would include the refining profit margins charged by the refineries of the source country and hence the refineries of India are handed an element of rent which is measured as a percentage of "Effective Rate of Protection". In India the ERP enjoyed by the refineries comes to about 40%!9
Let's break the theory down in numbers.
During the year 2011-12, 24% of domestic crude oil requirement was met by indigenous (domestic) sources.3 ONGC sells domestic crude oil at a discounted rate of 54.71$/bbl (FY '12).10 The international price of crude oil (Indian Basket) is 105.73$/bbl as on 10 Dec '12.11 Hence, the cost of crude oil used by oil refineries for producing petrol works out to around 93.48$/bbl. Applying exchange rate of 54.46, it is R5,092/bbl. A barrel of crude oil contains 158.98 liters.12 Hence, the crude oil component in the production cost of a liter of petrol is roughly R32 (As per IOCL Financials it is even lesser at R30.14 for the current year). Since the crude component constitutes around 90% of the total cost, the total production cost including the refining and other costs comes to R35.56.13 Add to it Inland freight of 0.65, marketing cost and margin of R1.47 and dealer's commission of R1.79.14 15 That brings the price of petrol before taxes to R39.47~.
So what makes R39.47 shoot up to R72.3?
Taxes comprise Excise duty of R9.48 and state VAT which is different for each state. Let's consider an average VAT of the Metro cities at R15~.16 Hence Taxes total up to R24.5~
The remaining R8.3~ is the OMC margin. But wait a minute, are the OMCs making profits? What with the media hue and cry of OMCs reeling under huge under-recoveries? The concept of under-recoveries is that if petrol is sold at a retail price lesser than the landed cost of importing petrol as an end-product at current Singapore market rates and at current exchange rate and customs duty, then the difference is a notional loss suffered by the OMCs since they priced the product lower than what they could have "competitively" priced. So for instance, if the landed import cost was R75, the under-recovery would be R2.7 (75 minus 72.3). Hence, the supposed "under-recoveries" are not real losses as we can see that the OMCs are still making a healthy profit. In fact, with the deregulation of petrol pricing in June 2010, OMCs are free to price petrol at international import prices. Thus, effectively there are no under-recoveries on petrol. However, the final price setting still has to go through the government nod and hence is influenced by the respective governments. Also, other petroleum products such as Diesel are still regulated. Hence there are under-recoveries on such products. Again, under-recoveries do not mean losses. For the year 2011-12, IOCL made a net profit of R3,954 crores, HPCL R911 crores and BPCL R1,311 crores.17 18 19 ONGC, which supplies indigenous crude to the OMCs at a "discounted rate" also made a profit of R25,123 crores. Ironically it is the no.1 profit making company in India!20 All the four OMCs are also part of the only eight Indian companies on the Fortune 500 List.21
Yet another issue in this regard is the government absorbing the under-recoveries by providing subsidies to the extent of 2/3rd of the supposed loss. The deputy chairman of the Planning Commission, Montek Singh Ahluwalia called for a cut in fuel subsidies as these were increasing the fiscal deficit.22 Are the subsidies actually causing a burden on the exchequer? Let's let the figures to do the talking. During the year 2011-12 the total fuel subsidy was R138 thousand crores of which 40% was borne by upstream oil firms (ONGC, OIL and GAIL).23 Hence the government effectively spent R84 thousand crores on subsidizing fuel while the total tax collections by both central and state governments on sale of petroleum products is R1,92,294 crores.27 If the government reduces its taxes by the amount subsidized, they would have to give no subsidies while still raking in the same amount of net revenues. Hence, the pointless, so-called "subsidies" is nothing but a mechanism to fool the people in believing that the government is taxing its exchequer for the sake of welfare of the people.
As regards the fiscal deficit, it amounts to approximately R5.22 lakh crores in the current year. On the other hand, the tax concessions provided to the already-rich corporate sector comes to around R5.28 lakh crores.24 Do the maths and you'll conclude for yourself.
Hence, two components that almost double the price of fuel are:
- Corporate profits
Through the concept of public limited companies, the government is making profits out of the sale of natural resources and also sharing it with private players (since the shares of these companies are traded on the stock market, private investors can hold stake by purchasing the shares). ONGC is the highest dividend paying company in India. Hence, the fuel price margin is added to the price which the entire population has to bear so that few enjoy the profits. Not just that, the margin on petrol is kept at the maximum through the dubious import parity pricing as already discussed.
Apart from making profits by owning majority stake in these companies, the government earns by charging exorbitant taxes on these sales which also has been addressed.
The Islamic system
Drawing parallel to the Islamic system in an Islamic state, both these major aspects which contribute to the spike in prices, Privatization and taxes on natural resources are absent.
Privatization means certain things or properties are taken out of public ownership and are placed under private ownership. Islam does not favour privatization of those public properties and means of production which are of common utility and keeping of which in private hands is harmful to the interest of the community. We can observe this through the following verses of Qur'an and Ahadith:
Allah سبحانه وتعالى says:
وَلَا تُؤْتُوا السُّفَهَاءَ أَمْوَالَكُمُ الَّتِي جَعَلَ اللَّهُ لَكُمْ قِيَامًا وَارْزُقُوهُمْ فِيهَا وَاكْسُوهُمْ وَقُولُوا لَهُمْ قَوْلًا مَعْرُوفًا
"Do not hand over to the simple-minded any property of theirs for which Allah has made you responsible, but provide for them and clothe them out of it, and speak to them correctly and courteously."
Abyaz-bin-Hammal Marbi reported that the Prophet صلى الله عليه وسلم took back a salt mine from him when he found that it was for common use of all Muslims. (Tirmizi, Ibn Majah)
The Prophet صلى الله عليه وسلم said: "The people are partners in three things, waters, feeding pastures and fire." (Ahmad)
According to this Hadith, all energy resources, including oil and gas wells, coal mines and electricity generation plants can never be privatized.
In the economic system of capitalism, under the guise of "freedom of ownership," it allows the colonialist and their agents to own public resources and hence oppress the masses by selling these resources to them at unaffordable prices.
The Prophet صلى الله عليه وسلم said: "The collector of taxes will not enter heaven." (Ahmad)
According to this Hadith, nobody is allowed to tax the people at will and the revenues for the Khilafah's state treasury are only those ordained by Allah سبحانه وتعالى. This denies the ruler the oppressive "right" to impose taxation, whenever and however he likes. Taxes are only collected according to what is divinely ordained which is taxing the amount that exceeds the needs and not the entire amount earned by the person. Hence, the oppressive Direct and Indirect taxes such as MAT, VAT, CST, etc are peculiar to the capitalist system and are absent in the Khilafah (the Islamic state). The Indian state is heavily dependent on fuel tax revenues. In fact, about 20% of total government revenue comes from tax collections from sale of fuel.25
On the other hand, Islam has its own unique system of revenue collection. Some of the sources are properties of Zakat, Jizya (head tax), Kharaj (land tax), export revenue on public properties, etc. which will generate funds for looking after the people, without oppressing them.
The Islamic state will neither impose taxes on these public properties, nor profiteer from them. This will significantly reduce the prices of power and fuel, providing relief for the masses and new life to the crippled industry and agricultural sector. Moreover, Islam has mandated that the revenues generated through the export of these public properties are placed in the Khilafah's treasuries and spent on all the citizens of the Khilafah, regardless of their race, gender, language or religion.26 28
Sharjeel and Faraz
6 Rabi'al-Awwal 1434 al-Hijri / 18 January, 2013 CE
28^"The Economic System of Islam" by Sheikh Taqiuddin Nabhani
~ Rough estimate
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