Why Petrol Prices are Rising Despite Lower Global Crude Prices – Detailed Analysis

As the Congress and the Opposition groups in India have come to realize that they cannot defeat Narendra Modi in the polls and cannot compare with him on sheer performance, their trolls have started a new campaign – of discrediting everything that Modi has done.  This attack – of using falsehoods and lies and fake news – to put forth a false narrative that attempts to resound with the middle-class by seeming to espouse their concerns, has already been successful in installing a serial liar and failed businessman to the White House in the US.  Since his ascendency, he has been dismantling the very basics of the American polity, institutions and life.

Congress and other parties have been responsible for making covert “alignment” with the Pakistani and LeT / Jehadi narrative and interests to the detriment of Indian security.  They plundered reminiscent of the British times in billions!  For the first time since independence, we finally have a Government which is strong, globally active, and setting things right where they should have been done many decades ago.  From an economy of subsidies and doles, the government wants to take the country to a point where India can work along the market forces while standing on its own.  For the greater good, the coffers of the country need not be depleted!

Of course, despite the criticism of the demonetization exercise (read How Modi check-mated Pakistan’s Devastating Assault and Unemployment halves since Demonetization), the fact is that it has brought in millions into the tax bracket ( read 9.1 million increase in tax payers and 24% rise in tax payers) – and billions in tax payments to the Government, which can be used for public good.

One of the trolling topics these days on WhatsApp and Facebook – using the false narrative by the Congress trolls – is the rise in Petrol prices even when the global prices are going down.  Here is how the Indian Finance Minister Arun Jaitley explains the reasons why the petrol prices are rising despite the lower Crude price.

He says clearly how the increase in Petrol prices are being used – (1) passed to consumers, which are offset by VAT from the local state governments; (2) Developmental activities of improving and creating rural roads and national highways.  The government plans to build 15,000 km of highways and roads and it will take Rs 1.76 lakh crore for that!

According to the road ministry, an additional Rs 1.76 lakh crore — nearly six times the annual budget of rural job guarantee scheme MNREGA — will be required over the next three years to build 15,000 km of highways.  Allocation of these resources to the road sector would also spur economic activity and employment generation, arising from the highway construction, an official said.

According to credit rating and research firm Crisil, the construction sector was the most labour-dependent among all non-agricultural sectors, requiring more than 12 people to produce Rs 10 lakh of real output.

Building roads and highways is an absolute win-win situatiion for the country.  When roads and highways come up and are modernized, it impacts economic activity across the country.  European Union Road Federation (ERF) study suggests that the impact on GDP from road projects is between 3-5% of the GDP increase!

The value added by road transport is estimated to account for 3% to 5% of Gross Domestic Product (GDP) on a global scale[2]. However, the value added by road transport is expected to be higher than the 3% to 5% estimated by the World Bank.

The good thing about the investment in roads and highways is that it is the most durable productive asset.  While life of a typical road is 60 years in the US, the life of a building is 31 years.  As highways push the economic development across the country for all sections and groups, it is important to ensure a high rate of highway construction and development!  To finance this work, as ambitious as it is, there are very few options that any government has.  So Indian government under Modi looked to finance it from the consumers of the roads themselves.  The motorists.

The decision to hike excise tax on petrol and diesel by Rs 2 per litre will come as a big boost to highway development in the country, which is moving at a snail’s pace. The increase is expected to generate nearly Rs 10,500 crore annually at a time when highway development is being pushed mainly through government-funding mode.

At present, about Rs 12,000 crore comes annually for highway development from the total fuel cess collection.  A government release said that fresh decision has been taken “in order to fund the ambitious infrastructure development programme of the government, particularly the building of 15,000 km of roads, during current and next financial year”. It added allocation of these resources to the road sector will also spur economic activity and employment generation arising from the road construction sector. (Source)

Context this with the fact that India’s working age population will get close to a billion – 900 mn by 2020!  How will the jobs come without investment in the infrastructure?  Highways being the major and the most important infrastructure component!  Over 280 million more people will enter the job market in India by 2050!  In the coming years, infrastructure will become one of biggest large employer for the country’s youth!

The US Highway System

The Dwight D. Eisenhower National System of Interstate and Defense Highways which was constructed by the Federal Aid Highway Act of 1956, has been the largest exercise in highway construction around the world.  The highway construction under this system has revolutionized living, travel and commerce in the US.  This was financed largely via the Highway Trust Fund, which wass established due to the Highway Revenue Act in 1956.  This act created a three-cent-per-gallon fuel tax, which went upto 4.5 cents per gallon!  It has been at 18.4 cents per gallon since 1993!

So cess or tax on gasoline or petrol is not a new thing or something the Modi government is doing for its own coffers.  This is how the next level of highways are constructed around the country if the economy has to be improved!

A review of this interstate system project done in 1996 – at the 40 year anniversary suggested that it was the best investment a nation has ever made!  The list of benefits included:

• It has enriched the quality of life for virtually every American.
• It has saved the lives of at least 187,000 people.
• It has prevented injuries to nearly 12 million people.
• It has returned more than $6 in economic productivity for each $1 it cost.
• It has positioned the nation for improved international competitiveness.
• It has permitted the cherished freedom of personal mobility to flourish.
• It has enhanced international security.

For all these benefits, generations of Americans have paid the cost.  But probably the generation in 1956 paid the cost first and the most.  So that the coming generations could benefit from their sacrifice.

Subsidies kept the prices low and demand for petrol and diesel high

In India, our earlier generations were foolish and greedy!  They wanted to lap up all the doles and subsidies so they could enjoy their money, while running the country’s infrastructure into the ground!  The highways and roads in India have been extremely bad and unsafe, the petrol prices were artificially kept low to keep the voting population feeling happy!  And, our parents and many of us thought that was the way to go!  No more.

This government worked to reduce or remove the subsidies where possible.  To see the high level of alignment between subsidies and consumption – sans relevant investment into highways of course! – let us see the chart below.

This chart from the IMF clearly shows the relationship between the subsidies and the petrol prices.

The chart below actually shows how the reduction in subsidies impacted the demand for Petrol and Diesel post 2008.

What follows from the chart above is:

1. From 1989 to 2008, increase in demand was rapid for both petrol and diesel!  During this period, the subsidy on Oil was very high!
2. From 2008 onwards, however, the demand for petrol fell and then the rise happened due to non-elasticity of demand over time.  But the diesel growth is almost nil from 2010!  This was also the time when the subsidies on Oil & Gas were reduced greatly.

The IMF report states in their study that the subsidies have always benefited the higher income groups and the brunt of paying for the subsidies is borne largely by the poor.

Most of the benefit from price subsidies goes to higher income groups, which consume greater amounts of fuels. Both the per capita monthly expenditure on fuel products and the share of fuel expenditures in total expenditures are substantially higher for higher income households (Figure 4). Whereas the bottom two income deciles allocate around 1.6 percent of total expenditures to fuel consumption, the top two deciles allocate nearly 6 percent of total expenditures to fuel.

The chart on the right clearly shows how the fuel expense consumption works out for the different income groups.

Preparing an India with a Billion Workforce

India’s population dividend is great – undoubtedly.  A billion young people in the workforce is no joke.  It can be a great engine of growth!  But if these youth are not employed and do not have jobs, then this very young population can cause doom for the country!

So, the ONLY insurance for the future being good for India is that there are enough jobs for them.  And, that will NOT happen unless we have the infrastructure that can handle the business and commerce of the future.  The key to that future infrastructure will be roads and highways as well ports.

Without adequate financing for such large and ambitious projects, results will not come.  And, for that, the current generation will need to invest.  To invest in the future of their OWN coming generations!  Make no mistake – without the infrastructure and the jobs and commerce, the life of your own kids will become a bigger hell than you can imagine!

So when you take a look at your petrol bill at the pump, do not lose sight of the larger and bigger long term picture for the country.. and your own progeny.