Petrol Prices - why Indians pay so much more

Indian consumers pay 70% more than Americans for fuel after yesterday's price hike. We pay significantly higher than our next door neighbors - 65% more than Pakistanis and Bangladeshis, 20% more than Chinese and 50% more than Sri Lankans. So, to understand why we pay so much more, let me try break the aprx cost of Petrol in Delhi:

Base Crude Price: 32.0
Cost of refining plus profit margin - 6.5
Transportation - 6.0
Dealer commission - 1.5
Central Govt. taxes (custom and excise) - 16.1
State Sales Tax - 12.0

Total price - 74

So, we pay almost as much in taxes as the base crude price. We are told these high taxes on Petrol are required to subsidize kerosene and cooking gas and contribute money for highways. Kerosene subsidy we all know is a cruel joke that perpetrates corruption and screws up our engines as retailers mix kerosene into Petrol to make money and pay their political godfathers. Highway tax of 2.5 a litre - well lets just say highway ministry is a hot ministry for a reason. Cooking gas is where it gets interesting. Assuming an average middle class family burns 50 litres of petrol every month, it ends up paying 1400 in taxes every month. My guess for average consumption of cooking gas would be around one cylinder per month. So, our government has successfully scammed us into paying 1400 per month to receive a subsidy of 500.

We end up paying close to 40% of fuel costs in taxes. This is the highest incidence of fuel tax outside of Europe where fuel taxes average around 50%. If one were to make an argument that government needs to tax petrol to promote social equity or protect environment, then I would humbly submit that Petrol is a basic necessity for almost everyone, not a luxury. As for environment, lets not forget European governments first invested in building an efficient and affordable public transport system before discouraging private transport. Our public transport infrastructure is probably the worse even among comparable emerging nations. Sometimes I believe it exists for the daredevils or those who just don't have any other option. There is a reason why vast number of people drive on motorcycles and scooters in temperatures as high as 45 degree Celsius and risk their lives by jamming in 3, even 4 on them - they would rather not risk their life on a Delhi bus or Mumbai local.

Price controls and state ownership of the Petroleum sector has done nothing to help the poor but has created a vast spectrum of vested interests that provide no incentive to improve inefficiencies, repress competition and promote corruption. Consider this - cost of refining (incl refining margin) in India is in excess of 6.5 rupees a litre while the comparable figure in the US is slightly lower than 5 rupees a litre. Does it make any sense. In India, refining costs and margins remain broadly the same as no one has incentive to improve efficiency and take a hit on profits for any competitive reasons. Further, compare the cost of distribution, marketing and dealer profits - it averaged around 3.5 rupees a litre in the US while transportation and dealer margin in India average close to 7.5 a litre. This is a direct result of lack of investment in building pipeline for oil transportation. India transports aprx 34% of petroleum products by pipeline while in US, this proportion is 66%. Pipelines are the most efficient and cheapest mode of transporting oil but this is again a sector dominated by the State and no wonder not much has happened.

It is time we start asking the State to withdraw from price controls and let market forces do their job. In any event, market forces cant be worse than current state of affairs in this industry.