Wednesday, January 13, 2016

The Power of Stupid - 1

Lately, I have been getting a lot of leftist style economics bashing (more accurately, neoclassical, capitalist, free market bashing) small stories, pictures, memes, and so on. Most of the times, these "anecdotes" have a strong condemnation with an ethical and humanitarian angle. However, all at the same times, these are utterly wrong representations - misinformed, manipulative, and misleading on purpose. With a little effort, I could see through the apparent idiocy of the same. At times, I tried explaining it too. But each time a new idiot pops up to share the same old anecdote to declare how economy is a facade for greed of few and it doesn't work and oh so poor are so exploited and all similar leftist brainwashing crap, I felt too drained to explain the whole principle again and again.

So now what I am going to do is this:
I will copy those stories and and explain those here on my blog. And each time an idiot shares the same old idiocy, I will put up the link in there to explain it again. Hopefully, this will counter the power of stupidity by a little... hopefully!

So the first one is this article from NDTV (no wonder the direction here):
Oil in India Now Officially Cheaper Than Mineral Water

The essence of the article is this: The Indian crude basket now has US$ X per barrel price tag; therefore, retail price of oil is Rs. 12 per litre, which is lesser than mineral water bottle at Rs. 15 per litre.

What the article purposely leads one into thinking is this: Yes, it is so unfair and unjust for this government to charge us Rs. 60 for petrol, when it gets oil itself for just 12 Rs. What a greedy bunch of profit-mongering corrupt capitalists.

What the article omits on purpose is this: Crude prices are internationally traded prices. Crude has to be processed into different commodities (petrol, diesel, aviation turbine fuel, kerosine, and so on) for retail usage. The cost of processing and cost of labour, safety, security, accounting, transportation, insurance, etc. has to be added to the cost of crude. Therefore, the retail landed cost of retail petrol is about Rs. 32/- whereas, the retail selling price is Rs. 60/-. So the comparable margins are not over Rs. 12 but over Rs. 32.

Now, come to the second part - why so much of taxes and why government has increased the excise on oil instead of letting the retail price fall. The answer is three-fold.
One, oil has many taxes that are levied by the states and oil being as essential commodity (therefore low price elasticity), state governments tax it a lot. The proposed GST also keeps oil (and alcohol) out of its ambit because of the same reason.
Two, oil has ad valorem taxes. It means the tax is not fixed but is determined as a percentage of price. So if oil prices fall, the taxes also fall. Since oil is a big revenue source, a sudden drop in the tax collection would mean government expenses have to be randomly cut down. Therefore, to meet the tax targets, tax rates are increased. When oil prices increased a lot around 2013, P. Chidambaram was overshooting the revenue targets with the same tax rates and therefore, had to cut down the tax rates as elections approached. Essentially, government is always trying to charge the same amount irrespective of the base price of oil.
Three, the government revenue is spent on lots of infrastructure and welfare activities. If government fails to meet the revenue targets, the expenses would also falter. Therefore, it is better to keep the revenue trajectory of a government on a stable path rather than shaking it with each change in oil prices.

Therefore, it ain't no grand capitalist conspiracy of greed folks but plain economic prudence!!

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