Rejoice, petrol price has gone up!

A motorcycle is the cheapest form of transport in India. Even cheaper than the buses run by the state transport undertakings. What’s more, a motorcycle can transport a family of four. It can be maneuvered pretty nicely, be it off-road, on-road or in-between cars and buses. It can be pulled out of tightest of traffic jams. It has a romance about it as well:-)

A good motor cycle costs less than 90 paise per kilometer to run. At 1200 km a month, this works out to about Rs.1100.

Much?

A two wheeler for middle-class families tops the ‘must-have’ list. (74% penetration in SEC A and 14% in SEC E)). No wonder, over 11 million were last year alone.

India has 75 million odd two-wheeler owners (that’s 6% of our population and about 20% of our households). All of them can be called well-to-do or middle-class.

By contrast, the 7 million car owning households (about 2% of our total households) are either rich or well-off. Majority of them spend about Rs.4,500 to 6,000 a month on running their respective cars. This would still leave them enough money to enjoy a comfortable lifestyle. Actually possessing car and being able to use it in itself is tantamount of having ‘arrived’.

All these households, i.e. both two-wheeler and car owners, also have cooking gas cylinders at home.  A cylinder

used for about 5-6 hours a day lasts about a month. At current price, this works out to about Rs.11 per day of spend on gas usage. Pretty miniscule, isn’t it? (To appreciate this, let’s ask ourselves how much ‘premium’ will we pay to refuel a gas cylinder when we run out of one and it’s not readily available?)

Since April 1 last year, petrol price has increased by about Rs.15 a liter, including Rs.5/liter hike announced last week. This is a 31% increase.

Huge!

Justifiably, people are angry. Many people I heard on TV were extremely upset with the government. They complained that the hike has caused ‘serious hardships on common people’. Opposition parties have planned protests and blockades. Headline in Business Standard said Petrol price hike to hit common man: economists.

When I heard that, I asked myself:  can less than about sixth of households who own cars, two-wheelers and LPG be called common people?

I believe, majority of them can’t be.

Why?

First, the 31% increase in petrol means an increase of about Rs.1,500 a month for car owners and Rs.200/month for two wheeler owners. This is fraction of their monthly income. Certainly, not enough to cause any hardship, especially of the serious count. Unless, you choose to call sacrificing one outing to eat out or a movie for family as ‘hardship’.

Second, in the same period, amount spent on using mobile phone by all family members collectively has gone up by a much higher amount! (Think 600 million mobile phone connections, with 8-10 million added every month).  Also, every common man I know, is happily upgrading to smart phones – an expense of at least Rs.10-12K.

Third, the restaurants and cinemas on the whole have recorded a huge increase in revenues. That means that we are spending a lot more for eating out and getting entertained.  My own estimate suggests this amount is far higher than the extra amount we are now spending on buying petrol. The 74 IPL matches this year alone would have made a little less than 2 Lakh common people poorer by Rs.800 crores spent on tickets to see matches, considering average ticket is Rs.1,500/-.

Fourth, car and two-wheeler sales have gone through the roof! We already are the world’s largest producer of two wheelers, and the world’s 10^th largest producer of cars. Not only has the demand for these vehicles gone up substantially, their effective prices have come down appreciably. Moreover, thanks to better technology, mileage has improved substantially and maintenance cost is now a fraction of what we spent during Ambassador and Fiat days.

Fifth, has the increase made anyone abandon his car or the two-wheeler and switch to public transport? If that were the case, the traffic would have eased a wee bit at least?

Conclusion: Petrol consumers aren’t common people. They don’t require any subsidy. In fact, by keeping the petrol prices artificially low, the government is actually being anti-poor.

Yes sir, low petrol prices are anti-poor!

Here’s why:

a.       Crude oil is a precious commodity, available in limited quantity. We produce very little of it. In fact, we have to import it and pay market price. As it’s consumed by the most affluent Indians, there’s no reason the government should subsidize it.

b.      By subsidizing petrol, the government has to reimburse to oil companies the losses they suffer by under-pricing petrol. This diverts tax payers’ money (the same affluent Indians who use petrol) back to oil companies. If we all paid market price for petrol, this money could have actually been pumped into developing roads, ports, electricity generation, providing drinking water  and education – sectors starved of funds, and hundred of other project crying for funds.

This is not small sum. The daily loss suffered by government’s oil companies alone is Rs.495 crores!

For example, the money that government is likely to reimburse towards subsidy to oil companies this year alone is likely to be Rs.1,80,000 crores  – four times more than what we spent on Guaranteed Rural Employment scheme last year! Or, about6 ½ times more what Delhi Metro rail has cost us to build. By pumping this kind of money on building electricity generation can help us make half our country power adequate.  (As per an industry report, India requires an additional 90,000 MW of generation capacity in the next 7 years with a corresponding investment in the transmission and distribution network. Yet, less than Rs.10,000 crores has been allotted by Finance Minster to meet this challenge this year).

Which is why I believe petrol price hike is good for common people. In fact, sooner we get rid of subsidy, the better for all of us, especially the poor. Not just for petrol, even for diesel, LPG and kerosene.

Here’s how I’d bit the bullet:

Majority of ‘affluent Indians’ I spoke of earlier have an average household incomes of Rs.3L/annum.  My estimate suggests, a complete abolition of subsidy across all forms of oil will cause an additional burden of about 15% to these people. The richer, of course will suffer less as they have higher disposable income.

What the government should do is make three simultaneous announcements:

First: No subsidy at all on any petroleum product. Completely abolished!

Second: Everyone is given a raise of 7 to 15% across the board to help them meet this additional ‘fuel’ burden.   Alsp mandated for private sector companies, shops and establishments and factories. The minimum wages stipulated by the government may be raised by a minimum of 25% as this segment, largely consumers of kerosene, would require greater support to meet the burden.

Third: Completely de-regulated fuel price here-on. Which means, price fluctuate up or down, directly in response to international prices.  This also means, transparent pricing.

With fuel subsidy out of the way, the government can focus on more important tasks. It also abolish petroleum ministry, who’s only job seems to fuel price regulation!