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Economy

Lowest Crude Price in 12 Years Means Only One Thing: The Government Will Tax You Some More

This would have been great news. The price of our crude imports is at the lowest in – well, a very long time.

ImportPrice

In fact, it’s the lowest price of crude, in dollars in the last 12 years (since December 2003).

Historical Crude Basket 

Why is it not good news?

Because the government will simply raise excise duties. It’s done that so far on every single dip in crude prices.

Look at the crude fall – from October 2010. And we now measure the crude price in rupees (to account for rupee depreciation). And while we got some benefit of lower prices, the bulk of the benefit has been kept by your friendly government:

Petrol diesel and Crude Comparison

However, this remains positive for airlines, whose ATF prices aren’t yet being hijacked by the government.

Soon the Middle east will give petrol for free, and you’ll still pay the Rs. 61 at the pump because the govt will just put that much as duty.

Our View: If you want to see prices fall and the economy recover, we have to see this benefit in our pockets. While it’s interesting that this government says it wants to reduce taxes and reduce the size of the government, all it’s doing is fattening itself up.

  • Shan says:

    True. I’ve been disappointed by the minimum government maximum governance broken promise also.
    However, the govt probably also realises that once prices go down its politically difficult to raise them even if int’l crude prices go up. So my guess is that they’re just smoothening things out. Whether this guess is true will be proven only when int’l crude prices rise.

  • Atul says:

    Such a biased article, I am highly disappointed specially since this is coming from a person of your repute, who understands data much more than any/most of us. If Government reduce the excise duty or keep it bit same the whole budget will go for toss leading to fiscal deficit moving out of control, leading to free fall in currency. With a import surplus economy like ours only data analyst like yourself can explain how will the condition of the country look like.

    • Well it’s not complex. The government owns 40,000 cr. of stake in L&T and Axis bank etc. It should sell that. It has INCREASED state in public sector banks – it should sell that down a little more. It can disinvest; imagine if IPOs are getting heady valuations in these lousy markets, then govt will get at least a normal valuation (the govt has been too greedy on valuations – better to sell at a price where investors can make a profit)

  • foo says:

    Think of it as a pollution control measure. EU govts. tax private cars and fuel heavily and at the same time subsidize public transport heavily to shift people into using public transport. I believe India should also do the same. Tax diesel vehicles heavily (they cry a lot when diesel prices are raised) and make petrol 100 Rs a litre.

    • Sorry but this is BS. If the government could provide proper public transport then fine, but in the absense of that people have to get around in order for the economy to grow. Making petrol expensive is a stupid strategy for someone who’s touting make in India. Why bother when all your input costs are higher here than other countries?
      I believe that cities should charge more (an urban tax) but there’s no reason for the people in smaller, less polluted and spread out towns and villages to suffer, and they should be our growht story.

  • Atul says:

    Deepak, I don’t have to tell you the difference between capital assets and current assets and why capital assets should not fund current expenses. Come on, you should be the last one to justify what you just wrote. L&T and Axis bank stakes are capital assets, personally I am against govt funding its fiscal deficit though selling family silver. Even if that’s case both of these companies are in painful sectors thus Govt wont fetch fair valuation forget about absurd valuation, recently hit ipos are primarily of Pharma sector (just to point out). Even if we take your case the day govt announces to reduce stake the stocks. The prices will fall further low (both Axis bank and L&T are trading at 52W lows) and LIC will be bailing out the FPO (again it will be greatly criticized by you) ignoring the fact the in most of the occasions LIC make a killing in short term be it SBI or recent IOC issue. The point is analysis always has two sides and people choose the side they want to present for vested interest, you will be knowing yours and I know my of defending the Govt 🙂

    • This is not family silver. The govt has no business running businesses or owning stakes in PVt enterprises like Lt or axis. These should have been sold from last year …I was writing then also. Even now its a good ides.
      We fund our capex through current revenues. The govt makes no distinction on the revenue ensd…and if ubare conversant with govt ACCTS u will know what I mean. Its revenue period.
      If we do that now and let fuel prices drop the economy will recover fast and the growth will bring us more taxes in subsequent years. Currently there is no hope for future years.
      I don’t like the govt forcing lic to intervene

      • Shash says:

        lol. You for serious dude. Deepak makes very good points. There is also another way to cut / maintain fiscal deficit tgts. It’s called cutting expenditure!
        The Govt was voted in power with promise of less government, less taxes and not what it’s currently doing. Deepak correctly points that out.

  • Atul says:

    It would be great to shower us with another article with data points, how the economy will recover faster with lower set of petrol and diesel prices.
    I am running a poll on Asan Idea of Wealth on facebook to know how much on an average household consume petrol/diesel per month. If able to get enough data points will try to access how much dent it is have per month on the household budget.
    We both are from Bangalore we know that Diesel prices are reduced substantially over last two years but rates of the bangalore bus transport system are stagnant or increased, same thing stands for private taxi’s/Auto’s or other commercial transport.
    In light of this, just curious to understand how the economy will recover faster with lower diesel/petrol prices:)

    • I think this is obvious economics for India. Fuel is a big input price in most goods and in transport of food and other products. Cut that by 50% and you will see lower prices and increased demand. For most low income families cost of fuel is a big expense…cut that by half and disc spending will go up. Cheaper prices more money in pocket…

      • Atul says:

        Interesting to see data guy defending himself with “obvious” 🙂

        • Interesting to see the goalposts being moved 🙂 When data’s given, then some drama about how family silver. When logic is given, then data 🙂 Typically if you’re biased in one direction, the argument goes nowehere 🙂

        • Atul says:

          Some how I missed the data part. Economically, I told that bus fares have not moved down even when diesel prices moved down dramatically. So, really can’t see the benefit accruing to public even with reduced prices (if that’s the data part you telling). Timing is crucial to sell technical analyst like yourself know the best and financial guy will tell you this is best time to increase holding rather than selling.
          Govt of Singapore is running one of the biggest sovereign funds around the world, I can name the big list. So, can’t really understand why Govt has no business holding shares in companies, managing them is non of their business but not sure if same is applicable for holding shares 🙂
          All of us are slaves of our opinion

        • Bus fares, auto fares, they are all sticky on the downside. Bus fares are lower than required (Ithink the BMTC hasn’t earned a profit yet?) so there will be a period of adjustment. In fact the main thing here is “sustained decrease”. If fuel prices are down 50% for a year, then you can bet that prices will come down. See tyres – the tyre companies refused to cut prices even when input prices were down – result? Chinese tyre companies are flooding the market with 50% lower priced tyres. Buses won’t cut prices? Then we might see the lower costs of Uber or Ola go even lower to compete.
          But the argument is not that bus ticket prices will come down. It’s that the fuel bills of people will go down. The cost to travel, say to Mangalore, may fall 25%. Or that trucks charge much lesser for the transportation, so food becomes cheaper. (This does happen all the time btw) Or that people spend less fuelling their motorbikes and cars. And what is the bloody point of petrol price deregulation if you determine the price of petrol through taxes? This is just silly – and if RBI didn’t like it when we discounted petrol through a subsidy, I do not like it when the government takes away the benefit side through a tax.
          I don’t think the government has any business owning shares in companies – including sovereign wealth funds. I can’t speak for Singapore – I couldn’t care less – but our government owning shares of private enterprises is a stupid idea and should only be temporary (i.e. with a clear goal to divest). Even that startup funding thing I’d clearly establish as debt and not equity, if I were to do it. I’m fairly clear that the government owning LT and Axisbank is a stupid idea, and while it was done in a desperate time, it has been 10 years sisnce and can be exited easily. And there will always be buyers.
          In the end, opinions will differ. It’s largely about whether an opinion can be changed through a rational argument, or whether the opinion itself is held so strongly that it transcends rational boundaries. It’s dangerous to be a victim of the latter, we all often are though

  • Dinesh Nagpal says:

    Govt needs to reduce stake in PSU as the other alternate to manage fiscal deficit. However, divestment (FPO) at current price levels will fetch them way below target levels. So till crude falls they will continue to reduce fiscal deficit accordingly, once crude reverses its trend and/or markets improve (psu stocks in particular) they will focus on divestment. It wont be surprising if they come out with a Disclosure scheme for Black money this budget. BoP is feeling the heat with fall in exports, FII selling and lock jam in Parliament is hurting FDI investment. Also it will be a win win situation for those hording $ outside keeping in mind how weak INR is and might continue to be till budget.

  • bhaskar says:

    I am also disappointed with the Govt who were earlier talking about reducing inflation & tax rates and then goes on increasing excise, service tax (hearing that the upcoming budget will again increase it by 2%), swatch bharat cess etc etc.
    OROP implementation and pay commission recommendations might have forced the hand of the government. though.

  • agrawalsrd says:

    Hi Deepak,
    Just curious if the crude price did become ZERO what will petrol/diesel cost at the pump? Assuming no modifications to duty/excise.
    Somebody on Quora mentioned crude is only 50% of the cost. Is that true? Surely that may have changed over time.
    What are the other associated costs and how have they moved?
    – refining
    – transport
    – operations
    – profit margins
    – under recovery (is this same as profit margins?)
    – central govt taxes
    – state govt taxes
    – what else is significant?

  • Bhushan says:

    Yes, the drop in crude is 65%, but if we add refining cost, then it comes slightly lower at 55% or so. Note that GRM of Reliance was 10 dollars and is still 10 !! they haven’t reduced margin in absolute terms !! Recently IOC chairman mentioned that while crude is falling, the spot price for diesel is not falling as fast.
    I am not defending government here, just saying that there are few more costs (fixed cost?) to diesel than just crude price.

  • Deep says:

    Some arguments supporting high taxes on fuel are absurd.To name a few
    1 EU charges high taxes .However India does not have the same level of governance as EU.Free education,Free healthcare,State Pension ,Unemployment allowances ,world class infrastructure.Where is all that in India? It is pure loot in India.
    2 Pollution.Automobiles are just soft targets.A recent study by IIT Kanpur showed that bulk of the pollution is coming from road dust , construction dust,inadequate waste management etc .private cars contribute no more than 10%.
    I agree 100% with the author we pay far too much for fuel,due to absued level of taxation.

  • N Batra says:

    Excellent Article Deepak. This is a fraud on the nation and the parliament. So much for the “free market pricing” on oil. The Government seems befuddled with what it wants to do- keep the fiscal deficit in check, spend on infrastructure, gobble up all the disposable income of the consumer in a difficult business environment.
    The Finance Minister needs to revisits his economics- In the iNdian economy the most efficient spender of resources ifs the Household sector followed by the Corporate sector followed by the Government. Anything down to invert that order will only result in a slowdown, destruction of consumer sentiment, ballooning of non performing assets and unchecked corruption and concentration of resources from many to the few.

  • Jigam Gandhi says:

    Hi Deepak,
    I agree with you that Govt should not increase the excise, but I feel govt is right in doing so. I will put in the rationale by giving examples.
    a) In the past If a price of petrol was increased by Rs 1/-, The next day the prices of vegetables / Milk / fruits among other things would be increased by 2 – 5 Rs.
    Now when the prices have fallen, have you seen the prices of the same things coming down,
    b) RBI reduce rates twice for the first time last year, none of the banks reduced the PLR, but they reduced deposit rates. In-fact Governor had to speak on records of passing the rates to consumers. and only after the rates were passed on to consumers , RBI bought in another rate cut.
    c) Have spoke with truckers about their freight prices, the rates are reduce by the for wholesalers, but not much as they feel it is the time to earn.
    d) Price of Auto / Taxis were raised in past looking at Petrol / diesel prices (Though they use CNG), Now when the prices have come down, have we seen reduction in fares ?
    What I feel is, The benefits of reduction in petrol or diesel is only enjoyed by middle man and There is nothing to rejoice for consumers. Let benefit of reduced price reach consumers, then govt may cut more taxes.
    Also, If the prices come down quickly People will feel fine, but when it rises again, the govt will be then compelled to raise prices, which public may not like it, it will also lead to more price rise and also govt will be under huge political compulsions.
    Now we can at-least be sure for sometime that prices of petrol / diesel will not go up drastically, if crude moves up. The govt will reduce excise.
    Till then let govt reduce deficit with this taxes, If fact these same users were subsidised heavily in the past when crude was at high.
    Regards
    Jigam

  • nandan says:

    surprising no one mentioned that this is a conciious choice by the government (a) to build up a war chest for Capital expenditure spend and (b) avoid raising costs when the crude prices bounce back up. I agree the latter is a poor argument, but check offline with some of the North block mandarins.
    The war chest for infrastructure spend etc will start being used from next months budget onwards is my take – this is supposed to provide enough detonation power to kick-start the economy back to life. Remember Modi will now be working year 5 backwards to see what he can do to deliver something before the next elections in a scenario where GST and Land reforms have not taken off as planned

  • Dharmesh says:

    Mr Jaitely is breaching the basic rule of Economics. Acting like a lawyer of SC and not FM of India