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# Should we allow free pricing of petrol in India?

The discussion of free petrol pricing is back. For the umpteenth time government is discussing the possibility of leaving the petrol prices to the markets. Will it be successful? That is a different discussion. But if it is implemented today – the price of a liter petrol would be 26 rupees.

Am I nuts? May be I am but, before we jump into conclusions let us do some math. There will be few assumptions which I have to make for the lack of better information. The assumption here is that we are following the US pricing model.

Which means I took an average of 1.975 dollars per gallon of gas or petrol. The source is GasBuddy. Without even going into the demand and supply of oil comparison between US and India, I did some simple math.

Here we go :

1 gallon = 3.78 liters. | 1 Dollar = 50 rupees.

The rates as per GasBuddy are ranging from 1.4 dollars per gallon to 2.55 dollars per gallon.

With the lowest rate of 1.4 dollars per gallon, 1 liter petrol costs 1.4*50/3.78 = 18.5 rupees

With the highest rate of 2.55 dollars per gallon, 1 liter petrol costs 2.55*50/3.78 = 33.7 rupees

If we take the average price then it would be : 26 rupees for a liter petrol.

Do you see any holes in the calculation? There could be many but, the bottom line is we are paying more for a liter petrol. I am sure there would be an immediate argument that the government has shielded the consumers when the oil was \$147 per barrel. But, if we apply the same calculation and use \$5 per gallon value – the price of liter petrol would be 66 rupees.

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Is the Indian market matured enough to handle the market prices? Or put it differently, Wouldn’t the oil marketing companies like HPCL, BP, Shell, Essar, Reliance be minting money by jacking up rates at will?

If the prices are left to markets, it would be a healthy environment for competition. That is where the private companies come in. New petrol stations would come up. This means 2 petrol station in the immediate vicinity will be offering 2 different rates. Without any apprehension, the consumer would pick the lowest price. That again drives the prices lower. Indiangasbuddy.com domain would be registered.

That was one fine hallucination.

Seriously guys, would the market prices work in India?

*Image source : kristiewells via flickr

1. Bizaholic says

Market pricing works for almost every thing. My guess is that it will work for petrol as well. When there is intense competition, best prices are bound to emerge.

Take the example of telephones in India. When it was a government monopoly, things were in bad shape and so were the rates. Once the sector was opened up, things changed dramatically within a decade. And of course, the consumer benefited the most.

So if petrol prices are determined by market, consumers would definitely get the best prices. The day this happens, it would be one of the brightest days of the Indian economy. But will our politicians let this happen?

2. desitrends says

So do I hope the prices to come down as well. But in this case I am afraid you have not factored Taxes when you priced fuel, which is a very essential component. How are American petroleum companies taxed ? In India the price of a litre petrol would be anywhere between 26-28 rupees should all the taxes be removed. Everything else that we are paying for is directly going into the kitties of the central and state govts. (as you may already have known its double taxation on petroleum products in India : the central govt’s and that of the respective state govts. )

The central govt. alone rakes in around 75000 crores annually in the form of taxes. The states govts. too rake in almost just as much but together. So i guess even if we are not taxed at all then we would still be paying as much as americans are paying after taxation.