Subsidies - How useful?

Just some days back, the Indian oil marketing companies (OMCs) declared a sharp hike in petrol prices to the tune of Rs 5 per litre. The move came immediately after the Assembly elections of some states. That was indeed quite an opportunistic move. Even after this hike, the OMCs are still losing about Rs 5.5 per litre. So there is a fair chance that there could be another hike in petrol prices soon. Not to mention, diesel and LPG is also set to get dearer later during the month.

The media has been constantly talking about rising crude oil prices and how the Indian OMCs are losing so much money as a result of fuel subsidies. To a logical mind, it seems obvious that if international crude oil prices are rising, there is no way we can escape the brunt of it. But if you look at some basic facts, you get a feeling that there has been some deliberate shaping of public opinion. In fact, fuel prices need not be as high as they are now.

The problem is that we fail to ask how much petrol really costs. Let's try some simple arithmetic. International crude oil prices are hovering around US$ 112.5 per barrel. That translates to about Rs 5,085 per barrel. Each barrel contains about 158.76 litres. So, effectively crude oil costs Rs 32 per litre. Now, add the cost of refining it to petrol or diesel. According to an oil company official, the refining cost is about 52 paise per litre. Add about Rs 6 as capital costs for the refinery. Then there's the cost of transportation (Rs 6) and dealer's commission (Rs 1.05). So, adding all that, the price of petrol comes to about Rs 45.6 per litre. But how much are we actually paying for petrol? Rs 68.3 in Mumbai, Rs 63.4 in New Delhi, Rs 71 in Bangalore!

Why are we paying so much more and to whom? The answer is tax. Not many are aware about the huge quantum of central and state government taxes and duties levied on fuel prices. In some states the tax component is pretty close to 50%. To add to that, these taxes are levied as a percentage of the basic price of the fuel and aren't fixed per litre. That means rising fuel prices only add more to the government's kitty. But all we hear about are the huge subsidies and the bleeding OMCs.

An optimal solution at the moment would be to reduce the tax burden on fuels. But neither the central government nor the state governments have shown any willingness to budge one bit.

The above is from the newsletter I receive from Equitymaster.
On the 17th I had criticized their newsletter which criticized subsidies.
This newsletter gives the correct picture as to why the prices of petroleum products are so high.50 % of what we pay for our Petrol, Diesel and cooking gas is used to finance the corrupt government in its corrupt deals. After increasing the prices by 50 %, then they squeamishly give subsidies to the poor and middle class which they are wanting to withdraw in the name of reaching higher GDP.
A much simpler method would be to remove the different taxes by the central and state governments.
If they want to withdraw subsidies, they should withdraw for those vehicles, petrol and diesel, used by the different arms of the government, quasi government and large private organisations.
Petrol and Diesel used by the general public for their personal used should be subsidized.
Cooking gas should continue to be subsidized for all.
Kerosene should be subsisized for use only for the poor with care being taken to see that it is not used to adulterate diesel or petrol