What You Pay For When You Pay for Fuel

There can be many justifications for high fuel prices. But the bottomline is that you are paying for the government’s excesses.

Narendra Modi took over as the prime minister of the country on May 26, 2014. On that day, the global price of the Indian basket of crude oil was US$ 108.05 per barrel. Back then, one litre of petrol cost Rs 80 in Mumbai. Diesel in the city was being sold at Rs 65.21 per litre.

Three years have gone by, and the global oil scenario has changed completely. On September 14, 2017, the price of Indian basket of crude oil was at $54.56 per barrel, around half of what it was when Modi took over as prime minister.  At Rs 79.5 per litre, the price of petrol in Mumbai on that day was more or less the same as it had been three years earlier. Diesel at Rs 62.46 per litre was slightly lower.

What is happening here? While the price of crude oil has halved, the price of petrol and diesel, which are by-products of crude oil, continues to remain more or less the same. (This argument may not hold all across the country, given that different states levy different taxes and different rates of taxes on petrol and diesel.) The gain because of the falling price of oil has been captured by the central government and the state governments, by increasing the different taxes that are levied on petrol and diesel. The commission given to pumps which sell petrol and diesel, has also gone up.

It isn’t necessarily a problem that governments are making more revenues. There are many useful things it could do with that money. But is it spending this windfall wisely? Can the common citizen, feeling the knock-on effects of these high fuel prices, rest assured that her suffering is for a good cause? To examine that, let’s look at some of the ways in which this money is being spent.

Exhibit One: Air India

Between 2010-2011 and 2015-2016, Air India has lost close to Rs 35,000 crore, and yet it continues to operate. The losses are not surprising, given that the airline business is competitive and the government clearly doesn’t have the wherewithal to run it. The question is, where does the money to keep bankrolling Air India come from? Think of that the next time you take out your wallet at a petrol pump.

Exhibit Two: Hindustan Photo Films Manufacturing Company Limited

This company is the fourth largest loss-making company among the loss-making public sector units. It made losses of Rs 2528 crore in 2015-2016. Between 2004-2005 and 2015-2016, the company has made losses of close to Rs 15,000 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. Think of that the next time you take out your wallet at a petrol pump.

Exhibit… heck, all loss-making PSUs!

In total, high taxes on petrol and diesel allowed the government to run 78 loss-making public sector enterprises in 2015-2016. Between 2011-2012 and 2015-2016, the loss making public sector enterprises have made losses of Rs 1,33,400 crore. Think of that the next time you take out your wallet at a petrol pump

Public Sector Banks

Between 2009 and now, the government has spent roughly around Rs 1,50,000 crore recapitalising public sector banks. The public sector banks have a humungous bad loans portfolio, as they keep writing off the bad loans. Their shareholders’ equity keeps coming down, and the government, as the largest owner, needs to recapitalise them. Take a look at the table below.

Gross non-performing advances ratio
Indian Overseas Bank 24.99%
IDBI Ltd. 23.45%
Central Bank of India 19.55%
UCO Bank 18.83%
Bank of Maharashtra 18.00%
Dena Bank 17.39%
United Bank of India 16.56%
Oriental Bank of Commerce 14.49%
Bank of India 14.20%
Allahabad Bank 13.72%
Punjab National Bank 13.20%
Andhra Bank 12.91%
Corporation Bank 12.14%
Union Bank of India 11.77%
Bank of Baroda 11.15%
Punjab & Sind Bank 10.80%
Canara Bank 10.00%

Source: Author calculations on Indian Banks’ Association data. As on March 31, 2017.

This table tells us that 17 public sector banks have a bad loans ratio of 10% or higher. This basically means that of every Rs 100 of loans that they have given, a tenth or more is not being repaid. The government currently owns 21 banks, after the merger of the associate banks of State Bank of India and the Bhartiya Mahila Bank with the State Bank of India.

Some of these banks like the Indian Overseas Bank are in a particularly bad state. This bank has a bad loans ratio of close to 25% i.e. one fourth of its loans have been defaulted on.

Where is the money to keep these banks going, coming from? In a world where money wasn’t free flowing because of high taxes on petrol and diesel, banks like the Indian Overseas Bank, UCO Bank, United Bank of India and Dena Bank would have already been shut down or perhaps been sold off. These banks are too small on the lending front to make any substantial difference to the total lending carried out by banks in India. But their losses do hurt the government a lot. Every extra rupee that goes towards funding these banks is taken away from something more important areas like education, health and agriculture.

Also, consider that given the different taxes implemented by different states, the price of petrol and diesel vary across the country. Take the case of the government of Maharashtra charging a drought cess of Rs 9 every time one litre of petrol is bought in the state. Why is this cess even there during a time when there is no drought in the state? It is just an easy way for the government to raise money. Most people don’t even know that they are paying for something like this every time they buy petrol.

The high taxes from petrol and diesel also helps the government to continue running many inefficient firms as well as banks. Any plan of closing down these firms and banks is likely to met with resistance and, for lack of a better word, hungama. Given this, it makes sense for the government to take the easy way out, maintain the status quo and continue running these firms and banks.

Donald Boudreaux wrote in The Essential Hayek:

People’s intense focus on their interests as producers, and their relative inattention to their interests as consumers, leads to press for government policies that promote and protect the interests of producers.

Any idea of shutting down or selling an inefficient public sector enterprise or bank is likely to be met with protests from the employees as well as the trade unions representing them. The political parties are likely to join in. Hence, it is easier for the government to maintain the status quo and not make any difficult decisions. But the money that goes towards keeping these individuals happy, is taken away from other areas like education, agriculture, health etc. The people who lose out because of this, do not have the kind of representation that people working for government-run firms have.

Of course, all this does not mean that there should be no taxes on petrol and diesel. But these taxes should be reasonable — and they would be if government spending itself was reasonable. With lower taxes, people would spend more money on personal consumption, and that would help economic growth. The impact on economic growth of individuals spending money is always greater than that of the government.

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Also check out:

The DNA of the NPA — Episode 32 of The Seen and the Unseen

The Banks of India — Episode 23 of The Seen and the Unseen