A chart of Fuel prices in Mumbai from 2010 till 2020

As is evident, over the past week, fuel costs have gone up to the highest ever in India. Several ‘social media economists’ are either going full throated rudaali against, or offering fact-free defence, and I’m starting to feel that most among them don’t understand fuel economics.

Here’s my attempt to explain it…

Fuel economics is much more than the cost of fuel. It is what that amount includes, who uses fuel, what it is used for, what that cost includes (commodity price + taxes), who ends up benefitting from these taxes, and most importantly, the part it plays in the overall budget of the country.

Firstly, what does the amount include:

Cost of Crude + Cost of transport + Cost of delivery (petrol pump profit incl): 35%
Taxes & Cesses: 65%

Now, of the taxes mentioned above, approx 2/5th are Central Government Taxes and 3/5th are state government taxes. Every state government levies it’s own % of taxes, which is why fuel costs different in different states. Here’s a snapshot of the same across a few states…

Now we come to – Who uses the fuel?:

• Personal Transportation
  • Cars – There are 22 cars for every 1000 people in India, making it approximate 2.8Cr cars. We can assume safely that this is the top 2% of India’s wage earners / wealthy (am reducing it from 2.2% to 2% as many among the top few own more than 1 car) If you add to that the company registered vehicles and commercial passenger vehicles (TouristTaxis/Uber/OLA/Taxis, etc), we get approximately 3% of India who owns cars.
  • Bikes – There are approx 17.5 Cr 2-wheelers in India. That makes bike-owners approx 12% of India’s population. We can safely assume that these would be at the same SEC as the car owners or just below them.
  • A 2-wheeler’s average mileage is 4-6 times that of cars, so cars end up consuming much more fuel than bikes. And automatically car-owners end up paying that much more per km travelled of fuel, than bikes do.
• Food Transportation – Approx 20% of food cost is transportation cost (it actually ranges from 5% to 30%, but we are taking 20% as an avg – on the higher side). Now approx 60% of all food is transported by road, rest by rail. Of the road transportation cost, approx 60% is fuel cost. So, of total food cost, only approx 7-8% is the fuel cost. Hence, a 20% increase in fuel cost leads to ONLY a 1.5% increase in food costs. So, something that used to cost Rs 100, now would cost Rs 101.50/- Negligible increase IMO. Of course, this increase is an average increase across the entire food basket and certain products like fresh vegetables ay have a slightly larger increase in costs than 1.5% but it still won’t be significantly higher in % terms.
• Other than the above, there are other marginal consumers too, like diesel generator users – mostly hospitals & all of Gurugram (sic). Also, we have farm equipment (tractor, thresher, etc) users, but they have limited use (only during specific times in the year) and a lot of them (the farmers esp.) get the diesel for free / heavily subsidised.

And let’s talk about – Who benefits from the fuel taxes? Where is this money collected by the govt as Fuel Taxes, going:

• Past dues of fuel. Some of it goes towards payment of past dues of fuel. There’s a past due amount to Iran which the UPA II had not provisioned for, of approx 6.5bn$ (as of 2016). Most of it has been paid in the past 5 yrs but some is still to be paid which will be paid this year & next year. It isn’t much but it still is not zero.
• The remaining goes into the common budgetary income pool, and which is used to fund things like the Food Security Act and Ujwala Yojana (free/cheap LPG in poorest-of-the-poor homes), Ayushman Bharat, and many other things like road construction, waterways building, etc etc etc. All of these things generally benefit all Indians, but benefit the bottom 50-70% of India’s socio-economic-class much more significantly than the top 20%.

So, effectively any reduction in the cost of fuel goes to largely reducing the burden of the richest top 15% of India’s population and within that too, most of it goes into reducing the cost burden of the richest top 3-3.5% of India’s population.
Now you can decide for yourself if the top 15% wage earners of the country need help, or the remaining 85%?

Further, we should also note how, over the years, the govt has eliminated fuel subsidies:

Fuel subsidies were the cruelest lopsided distribution of taxes in India. It ended up laying a debt burden on each & every Indian citizen while giving a break to the top 15% of Indians. It was ridiculous and I’m glad it has been gotten rid of now.

An additional data-point: Who is considered poor, low income & middle income in India?

• Poor – annual household income less than Rs 1.2L.
• Low income – annual household income between Rs 1.2k–2.5L.
• Middle income – annual household income between 2.5L–5L.

Incidence of car ownership in the first 2 groups (Poor & Low income) is ~zero. In the Middle income group, car ownership is less that 0.5% of all cars (1.1 car for every 10000 people).

Incidence of bike ownership in the Poor group is zero. In the other 2 groups (Low income & Middle income), it is less than 10% (less than 2 Cr bikes total across Low & Middle Income, out of a total of 17.5Cr bikes in India).

So the direct transportation cost increase on account of fuel cost increase – is near to zero on an average, for all of these 3 above socio-economic groups mentioned above.

Now pl peruse some more data:

How much Income Tax would a middle-class person pay?

Consumer Price Index based INFLATION

Over the past 6 yrs, the bottom rung among of the taxpayers have received a 55% reduction in the annual taxes they’ve been paying. Further, with CPI inflation hovering in the 2-5% range since 2016, instead of the 8-11% range before that, each rupee today buys much more (relatively) than what it used to 6 yrs ago. With a combination of these two massive improvements in their lives, the minor direct impact of fuel cost increase is something that they should bear, for the betterment / benefit of everyone. If they still don’t want to, and want to feel aggrieved, well then so be it. I’ll live with that.

All this noise being made about fuel prices is nothing but rhetoric by people who don’t even feel its pinch, and our (largely ignorant) media is doing calamitist coverage without doing any research or analysis. The sole beacon of high quality journalism in India is The Mint & WION and I am willing to bet that neither will not do a story exaggerating the impact of fuel costs. Infact the Mint has already written a piece describing the breakup of fuel cost and how the tax element within fuel has gone up over the past 5-6 years, as compared to earlier (which it has). It does outline clearly where the money paid by individuals is going and how the state of centre can reduce taxes to reduce costs but it in no way does any calamitist rhetoric.

So, all-in-all, while rising fuel prices look bad, the real impact on 85% of India is negligible and the biggest burden of it falls on the top 3-4% of India’s population and some marginal burden falls on the next 12%.

Lastly, CNG prices have not gone up. A car travels 10 kms per litre in petrol costing Rs 90. A car travels 20 kms per kg of CNG costing Rs 49/-. So all you carowners who have a problem with fuel costs – go ahead & convert your cars to CNG… Or the super rich amongst you – switch to an electric car or a hybrid and help to reduce India’s fuel bill further.

May The Force be with you!

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If some people still want a ‘simple’ explanation to the question, “Why does the government sell fuel for Rs 90 that it buys for Rs 35?”.

And to that, my simple reply is:
“The govt sells fuel (to the top 15% of India’s wealthy) for Rs 90, that it buys for Rs 35, so that to the poorest Indians:
– it can sell Wheat for Rs 2/kg that it buys for Rs 16/kg;
– it can sell Rice for Rs 1/kg that it buys for Rs 25/kg;
– it can sell Sugar for Rs 26/kg that it buys for Rs 40/kg;
– it can provide complimentary heath insurance to 50Cr Indians
– it can spend hundreds of crores to build toilets for free;
– it can provide complimentary gas connections;
– and fund many more such schemes that benefit the poor”

Hope its easier to understand now…

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P.S. This part of the post is political, so if that’s not your cup of tea, you can stop reading now…

I have taken the same state-wise fuel costs data (as above) and arranged it from lowest to highest cost-wise, instead of alphabetically as earlier.

Please see as under…

So, just look who is in government in 7 states from among these with the lowest-cost-of-petrol… And who is in government in the 6 which are the most expensive… And you’ll get to know which state governments are causing additional bulging of fuel prices…

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