governance, political economy, institutional development and economic regulation

Posts tagged ‘petroleum products’

Slash petroleum consumption

free

Retail prices of diesel and petrol are the lowest in Delhi, among India’s key metropolitan cities. It isn’t cheaper to supply them to the national capital than in Chennai, Mumbai or Kolkata. The difference is that Delhi and Goa levy lower value-added-tax on petroleum products (PP) than poorer jurisdictions, even though they are havens for high-income residents. But charity, they say, begins at home. And Delhi – the home of two governments and five municipalities – is the biggest beneficiary of a twisted application of this principle.

Bring petro-products under GST for pan-India consumer equity

State-level autonomy should be, but not to subsidise the better-off. Goa has the highest per capita gross state domestic product, followed by Delhi. Bringing petro products (PP) under a uniform Goods and Services Tax could ensure equity for consumers across state borders. Punitive tax rates on PP are desirable to slash consumption.

Petro Products import destabilise our external balance

We import 80 per cent of our PP requirement. The net import of crude oil and PP (after subtracting earnings from export) accounts for 50 per cent of our merchandise trade deficit. This is an unsustainable draft on foreign exchange resources. Oil price fluctuations are a of considerable volatility in the exchange rate of the rupee. This has knock-on negative effects on cross-border capital flows and the servicing of our external debt.

Petroleum prices instantly transmit shocks from war & politics internationally

In March 2018 the International Energy Agency said that “oil production growth from the United States, Brazil, Canada and Norway could keep the world well supplied, more than meeting global oil demand growth through 2020”. We expected lower oil prices. But in May, US President Donald Trump decided that Iran — a major oil exporter — should be threatened with sanctions for alleged deviations from oversight constraints on its nuclear enrichment programme, agreed with the United States under former President Barack Obama.

India is particularly vulnerable to collateral damage on its energy security. This alone is sufficient to push us to use PP mainly for road freight. In addition, there is the global need to curb carbon emissions and the domestic imperative to reduce air pollution and road congestion in cities.

High taxes and retail prices on petro-products & associated private motor vehicles can finance adaptation and mitigate the negative externalities.

Discriminatory taxes on the purchase of vehicles, graded by their carbon intensity and on fossil fuels – other than cooking gas and natural gas for meeting peak electricity demand – are socially desirable. Pricing diesel – an efficient but polluting fuel – the same as petrol can discourage its use for light passenger vehicles. The use of cooking gas rather than wood, coal or kerosene, has significant health benefits, particularly for women. It is a merit good. Using Rs 300 billion, or 10 per cent of the Union government’s Rs 2.8 trillion revenue from indirect taxes and royalty on the petroleum sector, as subsidy to promote cooking gas, is justifiable.

Consumers of petrol and diesel feel short changed since they never benefited from the decline of international crude oil prices. During the past four years (FY 2015 to FY 2018), the average cost of the Indian basket of crude was 43 per cent lower at $58.6 per barrel, than during the previous four fiscal years at $102.6 per barrel. Part of the reduction in oil prices was negated by depreciation of the Indian rupee. The average exchange value of the rupee against the US dollar was 24 per cent lower at Rs 64.50 during fiscal 2015 to 2018 versus Rs 52.10 in the earlier period FY 2011 to 2014.There was an insignificant change in the average retail price for petrol in Delhi between these two periods. It hovered on an average between Rs 64 to Rs 65 per litre. The Union government used the windfall benefits from cheaper oil to reduce the fiscal deficit by one per cent of GDP over the last four years. This was sensible. But more sustainable options are needed to remain within the fiscal deficit target of three per cent of GDP.

Oil price to remain high but stable this year: 

Significant changes in the oil price ($82.73 per barrel currently for the India basket) are unlikely this year. China will defeat the purpose of US sanctions on Iran. The rupee will also likely remain around Rs 72 to Rs 74 to the US dollar. The retail price for petrol in Delhi of Rs 80-plus per litre could be here to stay. Is this a killer for the average consumer? Not really.

Fuel cost is not the major cost in private transport

Consider that even at Rs 85 per litre, the petrol cost is just one-third of the total cost of using a low-end, high fuel-efficiency car over a life cycle of 100,000 km. For high end cars the fuel cost is even lower between 20 to 25 per cent of life cycle cost. Two-thirds to four fifths of the cost comes from the purchase price of the car and its maintenance.

Delhi is congested with private motor vehicles because fuel is cheap

Delhi accommodates just 1.5 per cent of India’s population. But it has 10 per cent of two-wheelers; 23 per cent of cars and 10 per cent of jeeps in the country. Low retail prices for petro-fuel incentivise Delhiwallahs to shun public transport; car pooling; the use of bicycles or merely walking to their destinations.

Cheap fuel makes public passenger transport unattractive 

bus service

Consider also the ensuing disincentive for a commercially viable, well-staffed, secure and reliable public bus or metro service because the alternative of personal transport is much more attractive. Admittedly, Delhi has severe security issues – particularly for women. But higher VAT on fuel can fund a bigger fleet of buses; finance a PPP with Uber, Ola for a 24×7 high-end bus service with digital security features; bridge the price gap with electric cars or fund secure bicycle and pedestrian tracks and overbridges. Levying user charges for overnight parking can reduce encroachment on colony roads in residential areas.

A mix of incentives and disincentives can wean people off their yen for motorcycles and cars. Massive, mobile chunks of highly-polished metal do not define the value of a human.

Highly polished, mobile, metal spewing toxic waste and hogging road space is a perverted status symbol

cars

These are hollow status symbols and a toxic wall between the haves and the have-nots.Our metros, like the National Capital Region, are well and truly mollycoddled. These magnets of opportunity attract migrants well beyond sustainable levels, who feed their sprawl. All those who choose to live here must learn to pay for the social and environmental cost they impose on the rest of India via their higher consumption standards. Equity should start at home.

Adapted from the authors opinion piece in The Asian Age, September 5, 2018 http://www.asianage.com/opinion/columnists/050918/pampered-metros-need-a-reality-check-on-fuel.html

Why spend more on babus? 7th Pay Commission

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Babus are looking forward to another bonanza, courtesy the 7th Pay Commission, which the previous government constituted just before demitting office. The armed forces, always better organized, are first off-the-mark with an earmarked Pay Cell already created, headed by a two star General, to lobby for better terms and conditions. Other Unions and Associations will also gather themselves together, once PM Modi signals the go-ahead.

Here are five reasons why he should not do so.

First, the history of Pay Commissions (the first was in 1946 with the rest following almost every ten years) validates that they achieve very little beyond finding the lowest commonly agreeable formula, for farming out pay increases to babus and the armed forces.   Never has the pay increase been linked to higher productivity or even to aggregate measures of productivity, like economic growth. Growth, admittedly an overly-broad measure, is now on the downslide and expected to remain that way for at-least another two years. Aam admis find it difficult to swallow, that babus should get paid more, whilst they themselves are struggling to make ends meet.

Second, babus have been getting 100% inflation neutralization twice a year, since 1996. The dreaded inflation (often itself the outcome of loose fiscal control and inefficient expenditure policies) consequently, flows-off babu backs, like water-off a duck, but swooshes down onto aam admis and makes their life miserable. The biggest sufferers are the 700 million poor.

The urgency for another increase in the “real” pay of babus is difficult to justify, in a strained fiscal environment, where subsidies have to be gradually moderated and administered prices of petroleum products, electricity, fertilizers increased-all of which stoke inflation.

Government also has to increase the tax-GDP ratio in 2014-15 to provide the funds needed for stepping up long forgotten defence equipment; higher outlays for education, health, sanitation, water and infrastructure; all this within a fiscal envelope which does not further aggravate inflation. Increasing existing babu compensation, in real terms, will only stoke the flames of inflation.

Third, if the government feels that the existing pay structure does not promote efficient functioning, it has only to look at the reports of the past two commissions. Both Commissions recommended excellent measures for linking pay enhancement to productivity, which remain unimplemented. The Administrative Reforms Commission did similar stellar work in 2008. Throwing more money at the problem of inefficiency is a highly ineffective way of trying to deal with it, which is bound to fail. Better to brush the dust of previous research and get down to implementation.

Fourth, less than 4% of India’s working age population of 500 million (ILO) is employed by government. The total formal sector employment (including in government) is less than 10%. Unlike government, in the rest of this “labour aristocracy” there is no assured inflation indexing and individuals have to justify every year, why employers should even neutralize inflation let alone give them an additional increase in “real” pay.

The residual 90% of other workers live in a jungle, where they survive by their wits, with no help from law or regulation. The Minimum Wage Act is a non-functional piece of legislative gloss, which is regularly contravened in the unorganized sector. None of us, including babus and politicians, who employ household help or buy products made in the informal sector, where “sweat labour” is the norm, walk-the-talk, by being willing to pay the prescribed minimum wage rates.  Even the lowest level of compensation in government is way above the minimum wages.

Fifth, the process of babu pay determination has acquired a routine automaticity, which needs to be disrupted. Opponents of abandoning the business-as-usual stance, argue that the outcome of stagnating babu pay in real terms will be higher levels of corruption. This is difficult to buy. Despite the consistent increase in babu pay since 1952, corruption has also grown not decreased. Babus, even at the leadership level, including the previous PM, “passively accepted” corruption, even if they have not actively associated themselves with the loot. They have not endeared themselves to aam admis by such behavior.

PM Modi has already started the process of interacting directly with babu-level chains of command and demanding from them, measurable, targeted performance, aligned with the government’s priorities. Pay rewards should follow only in 2018 (one year prior to elections in 2019) if performance improves.

Between now and then, the government should start publishing Annual Service Delivery Report Cards for every urban ward and every rural village, listing the manner in services have improved. Pay rewards beyond 100% inflation indexing (which already exists) should come only if the citizen reports show improvements from 2015 to 2017.

Let’s apply the same “value for money” standards to public finance, which resonate so well with our personal lives, vividly captured in the “kitna daite hai” (how many miles does it go in a liter of fuel?) metric, popularized by MARUTI.      

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