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Ever since i started hearing the term “under recovery” in recent economics and politics related debates and all, the term always caught my attention. And i looked for explanation for the term. I found many articles on it, most of them included the words like “congress” and “UPA” in a bad sense so i wont take it from there. Instead i’d  try to put an understandable version of the definition of the term.

We (India) do not import petrol and other fuels directly. We import crude oil and refine it into useful petroleum product like petrol, diesel, kerosene etc. in Indian refineries. Import of crude oil incurs cost, refining incurs cost, transportation incurs cost, and then there has to be an operating cost of all the entities involved. All these factors should contribute to cost of the final products. after working out these costs lets associate a value “A” with per unit of the final product as its “production cost“. I’ll take example of Petrol as our government claims it to be free-floating. Now consider the case in which we would have imported Petrol directly from the international market. For that we would have to pay as per the International Market Price. Lets say it is “B” per unit. And lets say the market price of Petrol in India is “C”. As per current conditions in India “A” < “C” < “B”. Please note that “C” is before taxation. After taxation price is even more than “B”. Here the gap between International Market price “B” and the market price in India “C” is called “under recovery“.

I have some basic question regarding the recent usage of this term and the scenarios related to it, e.g. Why we have to calibrate prices of home refined Petrol against the International price?  Why “C” is based on “B” and not on “A”? Why we try to equate “under recovery” and loss?

Now, as we have reached the topic of “loss”, i’ll start on it. IOC reported gross profit of 13,642 Cr in 2011, HPCL reported 3,768 Cr gross profit in the same financial year, BPCL reported 4,068 Cr gross profit in the same year. That the figures i pulled out from rediff money site. Now I agree that “gross profit” is not the indication of actual health of the companies, but share dividends definitely are. These 3 companies are consistently giving out dividends to its shareholders while government claims about “loss” to the petroleum companies.

Since now our government equates the “under recovery” to loss, hence we get the illusion of loss. While the truth is that the biggest beneficiary of the price hike is the government itself, through various taxes.

I tried to put the things simple in this blog. For the people interested more in figures i can suggest a link http://www.indiandefence.com/forums/social-political-issues/10989-why-petrol-prices-high-india.html