Petrol scoring century – Which factors to blame for high fuel price?

Dr M Rahman, Associate Professor, Galgotias University

And it’s a century…….???

Recently one morning, many people were discussing on a century scored by someone… I thought it might be a century by Kohli that I missed to watch due to my busy official schedule of developing future managers…… But ?

Ya, man. It was definitely a century.. but not by Kohli or Ashwin in a cricket stadium. It was a maiden century scored in the Indian oil market where the petrol price crossed Rs 100 in Sri Ganga Nagar, Rajasthan and then in Nagarabandh in Madhya Pradesh. (It is to be noted that fuel prices vary statewise due to local state taxes). Because of the increased fuel price, India got the status of a country where petrol is least affordable among the major economies of the world as well as the neighboring countries.

Affordability is a ratio of per capita daily GDP to the pump price of petrol and diesel. In large economies like USA, UK, France, China etc., a litre of petrol and diesel cost less than 5% of an average person’s daily earnings . In India, petrol and diesel cost almost 25% and 23% respectively of an average person’s daily income, that’s too high. With this high price, petrol is costlier in India than all the neighboring countries (Pakistan, Bangladesh, Bhutan, Sri Lanka  and Myanmar), except Nepal.

For sometimes there were enough jokes floating around in social media about petrol prices touching Rs 100. But now it came true to the surprise of the many people.

Now you may be think……Surprise, for what?

Many persons were surprised at the extremely high pricing of petrol as well as diesel at the time when global crude oil price was quite low as compared to the period when crude price was over Rs 100 as shown below.

In March 2012, when the price of crude was $124 per barrel, people were paying Rs 66 for a litre of petrol. But in Feb 2021, when the crude oil price was just $62 per barrel (half of 2012 crude price), petrol price touched Rs 100 per litre.  This was a big surprise to many individuals with logical brains in the country. (Note: 1 barrel = 159 litre).


Moreover, as shown in the graph (above), there has been a steep decline in crude oil prices since its peak during 2012-13. However, there was no proportionate fall in prices of petrol and diesel visible in India. Even, when there was sharp decline of crude price below $20 per barrel in April 2020 during the coronavirus related lockdown, the petrol price was around or over Rs 70 per litre across the country.

The above data surprised me too and made me think of exploring the reasons behind the steep hike in fuel prices and finding out the main culprits to blame for this.

Which factors to blame for high fuel price?

For the fuel price rise, many people including general public, experts as well as government representatives, blamed multiple factors – global crude price rise, COVID 19 and/or central as well as state taxes– depending upon their knowledge or personal biasness.

Should we blame global crude oil price factor for high fuel price?

Some people including Union petroleum and natural gas and steel minister Dharmendra Pradhan also blamed the crude oil prices at the global level and said that reduced fuel production and oil-rich nations seeking more profits were the primary reasons behind spiraling petrol and diesel prices in the country. But this blame didn’t have any substance as shown in the figure given below.

In March 2012 (as shown in the above graph taken from The Times of India), when the average crude oil price touched a record high of $123.6 per barrel, petrol and diesel prices were Rs 65.6 and Rs 40.9 respectively in Delhi. International crude prices have never been that high again, but retail prices steadily climbed in India. In Jan 2021, when the average crude oil price was much low at $54.8 per barrel (half of March 2012 price),  petrol and diesel prices were Rs 87.9 and Rs 78.1 respectively in Delhi.

So, the blame on global crude price for the increase in the fuel price is not at all justified.

Should we blame COVID 19 factor for high fuel price?

Some people attributed the high fuel price to the COVID 19 and associated lockdown by government on March 25, 2020. The prolonged lockdown put pressure on the petroleum companies due to low sale of oil, broke down the Indian economy and this dried up other revenue sources for the government. And the government was left with no option but to increase revenue from oil.

Definitely, COVID made a dent in the world economy with almost all of the major economies including India in negative growth zone.  Barring China, the world’s second-largest economy, all other major economies felt the negative impact of coronavirus pandemic. In the April-June quarter of 2020, except Chinese economy that grew by 3.2 per cent, all other major economies contracted.

The impact on India was the worst among the major world economies in the April-June quarter of 2020 as shown in the figure. The United Kingdom (UK) was the second worst sufferer with a 21.7 % GDP contraction, followed by France (-18.9 %),  Italy (-17.7%), Canada (-13%), Germany (-11.3%) and USA with 9.1%  GDP contraction.

India’s economic growth suffered the worst fall on record in the April-June quarter, with the gross domestic product (GDP) contracting around 24%. The coronavirus-related lockdowns mainly weighed on the already-declining consumer demand and investment. The Indian economy was already in bad shape prior to the coronavirus pandemic due to certain poor government policies.

Before the pandemic year, the GDP growth rate was already declining since 2017-18 and was just 4.5% in 2019-20.  Further with the entry of the pandemic in the Indian territory, the condition worsened. It’s just like attack of corona-virus on a weak person fighting with many diseases. That exactly happened with the country’s economy.

Considering the above facts and figures, COVID can’t be held totally responsible for high fuel price. Rather, government’s poor policies and poor performances over previous years should also be equally blamed for high petrol price.

Should we blame the central/state taxes factor for high fuel price?

If we analyse the base price of oil, associated taxes and dealer commission in Delhi, it’s shocking that over 60% of what we paid for petrol were taxes in Feb 2021, as compared to just over 30% taxes we paid for petrol in May 2014. The petrol price @ Rs 86.3 at retail outlets in Delhi at a much lower base price per litre in Feb 2021 was much higher than the petrol price @ Rs 71.4 at retail outlets in Delhi at a much higher base price in May 2014. The key reason for this unreasonable price was steep rise in the central government’s taxes from just 14% in 2014 to a huge 34% in 2021 as shown


in the table. Much of these taxes were raised last year as the pandemic dried up other revenue sources for the government. The elevated taxes kept fuel prices up in India even though crude oil prices had crashed and stayed low for much of 2020.

So, the large amount of taxes imposed by the central government must be blamed for the high fuel price in India.

Experts are of the opinion that the government must stop depending on taxes on fuel especially petrol and diesel to bridge its fiscal deficit as it hurts consumers pockets and feed into higher inflation. The rise in diesel price by over 6% (around ₹5 a litre) in the State since the beginning of the New Year has already begun to have a cascading effect. The transport cost of essential commodities such as foodgrains and vegetables has already shot up, and the general public (customers) will have to bear it.

Moreover, some people including opposition party members were of the opinion that rather than imposing higher burden on public in the form of taxes on fuel, the government should restrain from spending a huge Rs 20,000-crore on the central vista project when the entire nation is reeling under the coronavirus crisis. The government should also expedite recovery of the massive written-off bad corporate loans of Rs 5,85,473 crore on priority basis.

Conclusion

It is to be concluded that the global crude oil prices can’t be blamed for the higher petrol and diesel prices. Rather the poor economic performance of the government in the past and abnormal taxes on petrol and diesel imposed by the government of India are to be blamed for high fuel prices and for making the country least affordable on petrol and diesel among major economies. The corona virus related pandemic is also to some extent responsible for the fuel price rise. It is also concluded that the government must stop depending on petrol, diesel taxes to bridge its fiscal deficit as it hurts consumers pockets and feed into higher inflation. The government must also restrain from big ticket expenditures in the present time when the nation is in economic crisis and must focus on other revenue sources, other than fuel taxes.

What’s your opinion? Who should be blamed for the higher petrol price in the country? Write in the comment box.

Farms laws 2020 – More Benefits or Drawbacks in these laws?

Dr. M.Rahman, Associate Professor, Galgotias University

The three farm laws that were passed, with an aim to improve the country’s agriculture sector, by both houses of the parliament and received presidential assent in September 2020 received widespread protest from farmers across the nation. These laws – The Farmers Produce Trade and Commerce (Promotion and Facilitation) Act, 2020; The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020; and The Essential Commodities (Amendment) Act, 2020 – collectively seek to provide farmers with multiple marketing channels and provide a legal framework for farmers to enter into pre-arranged contracts among other things. The PM and many ministers in the central government claimed that enactment of these laws is historic and these would drastically improve farmers’ lives by increasing their income by selling their agricultural products anywhere in the country. However, these claims didn’t run well among the farmers and nationwide protests erupted. The farmer union’s claim that these laws would make the APMC (Mandi) system redundant, finish the minimum support price (MSP), leave the farmers at the cruel market forces and business houses and eventually ruin the farmers life. The farmer group’s mistrust on these laws resulted in thousands of farmers in Punjab, Haryana and several other states coming on the roads to protest against three farm laws since these were presented in the parliament.

Over the past one month, farmers started the fiercest protest and have laid siege to the national capital by blocking the highways to Delhi. The Modi government scrambled to find an amicable solution, but the multiple rounds of meetings between protesting farmer groups and the central government failed to reach any solid conclusion. The farmers are so angry with these newly formed laws that they are demanding nothing less than total scrapping of the laws.

Now the big questions come – Why the farmers are so angry with these laws? Why this mistrust between the farmers and the central government? Why don’t the farmers trust the words or intentions of PM Modi and its ministers who claimed passing of these laws by the parliament as the watershed/historic moment in the life of Indian farmers?

 Now there are two extreme opinions that have emerged on these farm laws. While one extreme opinion is ‘it’s a death sentence to the farmers’, other extreme opinion is ‘it will drastically improve the lives of the farmers’. Now, Let us try to understand the farm laws and the key provisions in these laws, and analyse the benefits from these laws as well as drawbacks in these laws.

About the enactment of the farm laws 2020

On June 5, 2020, with an aim to improve the agriculture sector and farmers’ lives, three farm related ordinances – 1. Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020, 2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020, and 3. Essential Commodities (Amendment) Ordinance, 2020 were promulgated by the union government. Since then there have been protests against these bills from the opposition members as well as farmer groups. But, rather than responding to the protests and considering the concerns of the protestors, the govt went on to pass the bill in Lok Sabha first and then in Rajya Sabha on on 17^th Sep and 20^th Sep respectively with severe resistance by opposition parties. These ordinances were finally converted into acts after presidential assent on 27th September 2020. Since then, there have been widespread and fierce protests of farmers across the nation. The three acts that have become contentious are:
1. Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020         
2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020
3. Essential Commodities (Amendment) Act, 2020

Now, let us try to understand the provisions made by these three laws one by one starting with Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020. The key provisions this act and its benefits as well as drawbacks associated with it without any any personal or political biasness.

Provisions in Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020.

1. Alternative Trading Channels: This act permits intra and inter-state trade of farmers’ produce beyond the physical premises of Agricultural Produce Market Committee (APMC) markets and other markets notified under the state APMC Acts. In simple language the farmer can sell their produce outside government regulated mandis or any outside trade area such as farm gates, factory premises, cold storages, and so on.  
2. Registration/License: No formal registration or license is required by an individual or business to purchase agri-produce outside mandis. Any PAN card holders can buy foodgrains from the farmers.
3. Electronic Trading: This act also facilitate direct and online buying and selling of the agricultural produce via electronic devices and the internet. 
4. No market fee or tax on trading outside APMC trade areas: There will be no market fee or tax on farmers, traders and electronic trading platforms for trading farmers’ produce in an ‘outside trade area’. 
5. Dispute settlement mechanism – This act provides for a three-level dispute settlement mechanism– Conciliation Board, Sub-Divisional Magistrate and Appellate Authority (normally district collector). No civil court will have the power to intervene.   

Benefits of Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020         

1. Availability of alternative trading channels: Farmers will have alternative options and the freedom to sell their produce outside the APMC (agricultural produce market committee)/mandis legally and there will be no tax on such trade which may give a higher price to the farmers. They can also sell online and can get a chance to connect with the modern IT world. APMC is not considered to be the perfect practice and need improvements as per many experts.
   
   It is to be noted that, previously sale and purchase of agri-produce could only be done in the APMC yards or Mandis in the specified area where the buyers have to pay at least the minimum support price (MSP) set by the government for specified agricultural products. At present there are 23 items on which the central government fixes MSP. The sale and purchase outside these mandis were deemed illegal as there were more chances of farmers’ exploitation on price and payment). But, this act has made it legal.

The minimum support price (MSP) is an agricultural product price set by the Government of India to purchase directly from the farmer. This rate is to safeguard the farmer to a minimum profit for the harvest. The central government sets the price for 23 commodities twice a year. These commodities include cereals (paddy, wheat, maize etc.), pulses (moong, urad, tur etc.), oilseeds (peanuts, sunflower, soyabean etc.) and commercial crops (cotton, jute, sugarcane and copra).

2. Promotes Inter-state and intra-state trade: Farmers can sell their produce within the state or anywhere else in the country and there will be no restriction on this type of trade. This will benefit the farmers that they will be able to sell their produce to the merchant wherever they get a higher price.
It is to be noted that, earlier, they were not legally allowed to sell in APMC/mandis in outside the specified areas.

3. Farmers can sell to anyone with a valid document like PAN card: There will be no need for any kind of registration or license for traders to purchase agricultural produce of farmers in the trade area outside the APMC mandi. Those holding PAN card or any other document notified by the Central government can join this trade. This will facilitate trade in agricultural products and will benefit the farmers.
Note: Trading in APMC areas/mandis need proper registration and every transaction is recorded.

4. Fast dispute settlement: In case of any dispute arising in such business, the matter will be settled within 30 days by the Sub-Divisional Magistrate. This is really good for the farmers if it’s done with seriousness and honesty.

Drawbacks of Benefits of Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020         

1. No MSP and chances of exploitation on price: Outside APMC yards, MSP or minimum price is not guaranteed and there are chances farmers may be exploited on price decided by traders and the cruel market forces.

Farmer groups claim that the states where APMC/Mandi system is poor like Bihar, farmers sold their foodgrains at a price much lower than the MSP fixed by the government. The farmers in Punjab and Haryana are financially sound as compared to other states like Bihar because the former sell their products at MSP in APMC mandis thereby getting over Rs 1800 per quintal for wheat and paddy against the later getting a much lower price than the MSP.

2. Business in APMC (government mandis) may suffer – Since there will be no taxes/fees in outside trade areas, it would lead to uneven competition and trading would move from govt mandis to private trade areas and ultimately the APMC/govt mandis will be finished. This will create two types of markets – one with tax and other without tax.  This is a favour to those trading outside APMC trade areas.

As claimed by the President of the Maharashtra Rajya Bazaar Samiti Sahakari Sangh, Dilip Mohite Patil, around 100-125 market committees (mandis) in Vidarbha and Marathwada regions have reported almost no business and are on the verge of closure after the announcement of the central Ordinance in June 2020. 

4. Loss of income of those engaged in APMC: There are many traders and agents engaged in facilitating the sale and purchase of the farmers’ products. Some invested money in their shops or godowns in the APMC area.
Farmer groups claim that since there is no fee/taxes on outside trading areas, business may shift from APMC areas to outside trading areas. The loss of business in APMC areas would endanger the livelihoods of many persons working in or engaged with these areas.
It is to be noted that farmers selling in government mandis have to shell out around 10% as mandi fees and taxes.

5. No judicial support: Since there will be no intervention of court i.e. judicial support (as per this act), the farmers will be at the mercy of the government authorities (SDM, Collector) In case of dispute. People have more trust on courts than that on government babus, and so its a drawback.                                                                   

6. Poor regulation on traders outside govt mandis: As per the act, no formal registration or license is required and anyone with a PAN card can buy from farmers outside mandi areas. With this, farmers will be exposed to the risk of fraud due to the entry of people without license or registration. There could be more chances of cheating/fraud with emergence of fly-by-the night operators.

Conclusion

The Farmers Produce Trade and Commerce (Production and Facilitation) Act, 2020 has good intention but without strong safeguards to the farmers. It would have been better, if farmers concerns were taken into consideration by the government while formulating the bill. The government should remove the drawbacks associated with this law so that the farmers can realize the full benefits out of its implementation and improve the nation’s economy. The government should improve the deficiencies in APMC/mandis, assure MSP or develop some pricing mechanism so that the farmers don’t have to play in the hands of cruel market forces while selling in areas outside APMC, impose fee/taxes in outside trade areas at par with the APMC trade areas so that there is a level playing field between the two areas, provide judicial support in case of dispute not settled by SDM or collector, and provide for registration/regulation of buyers outside APMC (mandi) areas so at that farmers won’t be exposed to the risk of fraud due to the entry of people without license or registration. So, it is to conclude that this law should not be repealed, rather the government should improve/amend it so that it becomes good for the farmers and the nation.

For provisions, benefits and drawbacks of other two farm laws CLICK HERE

Why the Retail Giant ‘Future Group’ Failed?

Dr M.Rahman, Senior academician in Business Administration

Unable to bear huge debt and liabilities and compete in the dynamic retailing business environment, India’s retailing giant Future group led by Kishore Biyani (known as “The King of the Indian Retail”) owning flagship store ‘Big Bazaar’ has accepted a proposal of acquisition from Mukesh Ambani led business conglomerate Reliance Industries Ltd. Big Bazaar stores were considered to be ‘the Indian version of America’s Walmart stores’. However the Future group failed to manage its momentum due to certain reasons and this article made an attempt to understand the reasons behind its failure.

..

Failure of Future group and the proposed acquisition

In the past, the world saw many business giants like My Space (in social media), Nokia (in mobile phone), Kodak (in Camera), Jet Airlines (in Indian aviation sector) and many others unable to stand in the cut-throat competition and ended up either being acquired by other business giant or shut down. In this list, the latest addition is India’s retailing giant Future group led by Kishore Biyani commonly known as “The King of the Indian Retail”. Unable to bear huge debt and liabilities and compete in the dynamic retailing business environment, Future group’s retailing business that owns flagship store ‘Big Bazaar’ has accepted a proposal of acquisition from from Mukesh Ambani led business conglomerate Reliance Industries Ltd through its subsidiary Reliance Retail Ventures for an amount Rs 24,713 crores.

However, the Future Group asset acquisition is subject to regulatory and other customary approvals, which may take around few months to complete. At present, this deal is going through legal proceedings filed by Amazon (a stakeholder in Future Retail) in Singapore International Arbitration Centre (SIAC) against the deal.

As a part of the proposed deal, Reliance Retail Ventures (RRVL) will take over more than Rs 19,000 crore of debt and liabilities owed by Future Group’s retail, wholesale, logistics and warehousing units until March 31, 2020. Future group owned renowned companies like Future Retail Ltd., Future Lifestyles Fashions Ltd., and Future Supply Chain Solutions Ltd. will be now owned and managed by RIL through its subsidiary. While Future Retail owns the flagship Big Bazaar alongwith many other popular stores (including HomeTown, Food Bazaar, FBB, Easyday, Nilgiris, FoodHall, Heritage Fresh and WHSmith), Future Lifestyle Fashions Ltd operates fashion discount chain Brand Factory, Central and Planet Sports.

While this acquisition (if completed successfully) will further strengthen RIL’s financial profile and competitive position and add about 1,700 large stores to RIL’s 11,806 stores in its retail segment and increase its organised retail revenue market share by around 5 per cent. (according to Fitch Ratings, a global research firm), it will kick out Kishore Biyani out of retailing business for many years. After this transaction, Future group will retain the manufacturing and distribution of FMCG goods and integrated fashion sourcing and manufacturing business and its insurance JVs with Generali and JVs with NTC Mills.

It’s irony that with this deal Kishore Biyani known as the finest brain in Indian retail sector and considered as “the King of Indian retail’ would have to remain out of any retailing venture for the next 15 years. Kishore Biyani is known for pioneering organized retailing in the country with the launch a chain of modern retailing formats like supermarkets and hypermarkets across the nation.

..

About Future Group

Future Group is a corporate group headquartered in Mumbai (India) in 1987 and founded by Kishore Biyani in 1987 as a garment manufacturing company that sold formal trousers under the brand name of ‘Pantaloon’. Over a period of time it diversified rapidly and the group is now known for having a significant prominence in Indian retail and fashion sectors with popular retail chains like Big Bazaar, Food Bazaar, Home Town, Brand Factory, Planet Sports, etc through its operating companies Future Retail Limited and Future Lifestyle Fashions Limited. In addition to retailing, the group has a notable presence in integrated foods and FMCG manufacturing sector, logistics, insurance, logistics & supply chain as well as apparel design and manufacturing sectors.

Kishore Biyani is known for launching India’s first hypermarket ‘Big Bazaar’ in the country around 20 years ago when organized retailing was at the introduction stage. It was scaled up rapidly to over 250 stores across 120 Indian cities over years. Biyani’s success with Big Bazaar under Future Retail had turned him into a revered figure in the Indian retail sector and a magnet for media attention. He was running the largest retailer in the country and was named as retailer of the year by the National Retail Federation, which at one earlier point had refused even to admit him.

Future group’s flagship comapny Future Retail operated 1,550 stores with its flagship brands Big Bazaar, FBB and Foodhall, Easyday, Heritage Fresh and WHSmith. Future Lifestyle Fashion operates 354 stores of Brand Factory, Central and Planet Sports. On any given day, over 2 millions visit future group stores and digital networks as claimed by Future group website (www.futuregroup.in). In addition to retailing, the group also has presence in FMCG, insurance, media, logistics & supply chain as well as apparel design and manufacturing. The group operations were performing ok with Future Retail clocking a total revenue of Rs 20185.37 cr and a net profit of Rs 732.81 cr in FY 2018-19. Also, Future Enterprises Ltd that holds largest shares in Future Retail and other group companies had a revenue Rs 5433 cr and a net net profit of Rs 133 cr in FY 2018-19 against a revenue of Rs 6065 cr and a net profit of Rs 175 cr in FY 2019-20.

However, when the group was earning profit in FY2019, what happened to “The King of The Indian Retail’ –  Kishore Biyani led Future group that compelled it to sell out its flagship retailing and logistics businesses to RIL in August, 2020. Let’s us try to understand the underlying factors/reasons.

Why Future Group Failed

Selling of its complete stake in Future Retail to Mukesh Ambani’s RIL is seen as the biggest setback to Koshore Biyani, known as one of the best minds in retail business in India. But how did he come to this point? What were the reasons behind the sell out? Lets us understand ‘why Future group failed’?

Key Reasons – Why Future Group Failed?
Huge debt
Aggressive expansion, Unrelated Diversification
Inability to leverage online retailing
Corona-virus pandemic

CLICK HERE for Details of ‘Reasons behind the Failure of Future Group‘