{"id":5320,"date":"2018-09-16T20:59:43","date_gmt":"2018-09-16T15:29:43","guid":{"rendered":"https:\/\/gtm360.com\/blog\/?p=5320"},"modified":"2022-02-16T13:40:45","modified_gmt":"2022-02-16T08:10:45","slug":"what-can-government-do-about-petrol-price","status":"publish","type":"post","link":"https:\/\/gtm360.com\/blog\/2018\/09\/16\/what-can-government-do-about-petrol-price\/","title":{"rendered":"What Can Government Do About Petrol Price?"},"content":{"rendered":"<p>Today&#8217;s <em><strong>Times of India<\/strong><\/em> has two op-eds on petrol pricing.<\/p>\n<p>The one by\u00a0<a href=\"https:\/\/blogs.timesofindia.indiatimes.com\/Swaminomics\/yes-petrol-and-diesel-taxes-are-steep-no-dont-cut-them\/\" target=\"_blank\" rel=\"noopener\"><strong>Swaminathan S Anklesaria Aiyer<\/strong><\/a>\u00a0(@swaminomics) advises the government to hold taxes at their present levels and leave petrol prices as they are.<\/p>\n<p>The other by\u00a0<a href=\"https:\/\/blogs.timesofindia.indiatimes.com\/The-underage-optimist\/centre-needs-to-stop-acting-like-robin-hood-and-move-fuel-to-gst\/\" target=\"_blank\" rel=\"noopener\"><strong>Chetan Bhagat<\/strong><\/a>\u00a0(@chetan_bhagat) advocates exactly the opposite approach.<\/p>\n<figure id=\"attachment_5322\" aria-describedby=\"caption-attachment-5322\" style=\"width: 620px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-price-govt-fi.jpg\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-5322 size-full\" src=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-price-govt-fi.jpg\" alt=\"\" width=\"630\" height=\"280\" srcset=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-price-govt-fi.jpg 630w, https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-price-govt-fi-200x89.jpg 200w\" sizes=\"auto, (max-width: 630px) 100vw, 630px\" \/><\/a><figcaption id=\"caption-attachment-5322\" class=\"wp-caption-text\">Image Credit: Times of India (16 Sep 2018)<\/figcaption><\/figure>\n<p>In the past, I&#8217;d leaned towards the former point of view.<\/p>\n<p>That changed after I got the following perspective from the latter article.<\/p>\n<ul>\n<li>&#8220;Fuel prices are technically supposed to be market driven, linked to international crude prices and foreign exchange rates. Practically, they are not.&#8221;<\/li>\n<li>That&#8217;s because local taxes are the third driver of price and they&#8217;re under the government&#8217;s control. Ergo, government can modulate petrol prices if it wants to<\/li>\n<li>Taxes comprise Central Government Excise Duty and State Government VAT<\/li>\n<li>Excise Duty is a flat figure of INR 20 \/ liter. It does not vary with the price. Therefore, central government does not earn more or less tax revenues as a result of increase or decrease in the base price<\/li>\n<li>VAT is <em>ad valorem<\/em>, which means it&#8217;s a percentage of the base price. (The percentage also varies from one state to another. For the rest of this post, I&#8217;ll use the figure of 40%, which is the prevailing rate in Maharashtra.) VAT collections by state government do rise or fall as a result of increase or decrease in the base price<\/li>\n<li>Since total tax percentage is a computed figure, it can change from day to day. This is unlike most other taxes, which are fixed at a certain percentage that remains constant until the next Budget<\/li>\n<li>Four years ago, Excise Duty was INR 9 \/ liter and VAT was INR 14 \/ liter. If we went back to those taxes, current price would be INR 63 \/ liter. Incidentally, this is close to the imputed fair price of INR 69.03 \/ liter, computed on the basis of the so-called Big Mac Index (Per\u00a0<a href=\"https:\/\/www.statista.com\/statistics\/274326\/big-mac-index-global-prices-for-a-big-mac\/\" target=\"_blank\" rel=\"noopener\"><strong>Statista<\/strong><\/a>, Big Mac Index is 2.51 for INDIA and 4.23 for UK; Pump prices per liter of petrol are INR 80.22 and INR-equivalent of 116.34 in UK respectively. Ergo fair price in India is 116.34*2.51\/4.23 = INR 69.03 \/ liter)<\/li>\n<li><a href=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2017\/10\/LOSS-AVERSION-NEGATIVE-COPY-fi-3.jpg\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4467\" src=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2017\/10\/LOSS-AVERSION-NEGATIVE-COPY-fi-3.jpg\" alt=\"\" width=\"250\" height=\"111\" srcset=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2017\/10\/LOSS-AVERSION-NEGATIVE-COPY-fi-3.jpg 630w, https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2017\/10\/LOSS-AVERSION-NEGATIVE-COPY-fi-3-200x89.jpg 200w\" sizes=\"auto, (max-width: 250px) 100vw, 250px\" \/><\/a>When crude prices fell four years ago, pump price should have fallen to INR 40 \/ liter but they did not. That&#8217;s because the government interfered and increased the Excise Duty to INR 20 \/ liter from the then prevailing figure of INR 9 \/ liter. The common man didn&#8217;t seem to notice this move at the time. I don&#8217;t know how a billion-plus, supposedly-price-sensitive Indians missed it. Maybe it&#8217;s another manifestation of the famous\u00a0<a href=\"https:\/\/en.wikipedia.org\/wiki\/Loss_aversion\" target=\"_blank\" rel=\"noopener\">Loss Aversion principle<\/a>\u00a0of Consumer Behavior, which states that the <em>fear of losses is twice as powerful as the lure for gains<\/em>. In this context, it appears that <strong>Consumers are more likely to notice a price increase than the absence of a price reduction<\/strong><\/li>\n<li>If the government intervened to increase Excise Duty four years ago, it should very well intervene to reduce Excise Duty and VAT now, thus bringing about a welcome drop in petrol priceS. This is despite @swaminomics&#8217;s warnings against lowering excise duty for reasons related to maintaining foreign investor confidence and other arguments around the need for more money for infrastructure development, and so on<\/li>\n<li>Barring the pump price and base price, the above perspective is equally applicable for diesel pricing.<\/li>\n<\/ul>\n<figure id=\"attachment_5326\" aria-describedby=\"caption-attachment-5326\" style=\"width: 151px\" class=\"wp-caption alignleft\"><a href=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra.jpg\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-5326 size-medium\" src=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra-161x200.jpg\" alt=\"\" width=\"161\" height=\"200\" srcset=\"https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra-161x200.jpg 161w, https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra-768x957.jpg 768w, https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra-822x1024.jpg 822w, https:\/\/gtm360.com\/blog\/wp-content\/uploads\/2018\/09\/petrol-taxes-maharashtra.jpg 1204w\" sizes=\"auto, (max-width: 161px) 100vw, 161px\" \/><\/a><figcaption id=\"caption-attachment-5326\" class=\"wp-caption-text\">CLICK TO EXPAND<\/figcaption><\/figure>\n<p>Many people, including Chetan Bhagat, seem to believe that petrol prices will automatically come down if it&#8217;s brought under the GST regime, the logic being the highest slab of GST @ 28% is much lower than current petrol taxes of ~80% (see sidebar on the left).<\/p>\n<p>I&#8217;m not so sure. What&#8217;s the guarantee that a special GST slab of ~80% won&#8217;t be created just for petrol?<\/p>\n<p>So, I&#8217;ll stick to my call for cutting down Excise Duty and \/ or VAT in order to reduce petrol price.<em>\u00a0\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Today&#8217;s Times of India has two op-eds on petrol pricing. The one by\u00a0Swaminathan S Anklesaria Aiyer\u00a0(@swaminomics) advises the government to hold taxes at their present levels and leave petrol prices as they are. The other by\u00a0Chetan Bhagat\u00a0(@chetan_bhagat) advocates exactly the opposite approach. In the past, I&#8217;d leaned towards the former point of view. That changed &#8230; <a title=\"What Can Government Do About Petrol Price?\" class=\"read-more\" href=\"https:\/\/gtm360.com\/blog\/2018\/09\/16\/what-can-government-do-about-petrol-price\/\" aria-label=\"Read more about What Can Government Do About Petrol Price?\">Read more<\/a><\/p>\n","protected":false},"author":4,"featured_media":5322,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[17,8,7,1],"tags":[],"class_list":["post-5320","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-b1-integrated-marketing","category-it-marketing","category-retail","category-mandatory-category"],"_links":{"self":[{"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/posts\/5320","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/comments?post=5320"}],"version-history":[{"count":10,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/posts\/5320\/revisions"}],"predecessor-version":[{"id":9169,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/posts\/5320\/revisions\/9169"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/media\/5322"}],"wp:attachment":[{"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/media?parent=5320"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/categories?post=5320"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gtm360.com\/blog\/wp-json\/wp\/v2\/tags?post=5320"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}