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Thursday, August 5, 2010

Deregulation of Oil Prices: Need of the ‘New’ India

We have something to cheer about on the reforms front: the government has at last picked up the courage to give freedom to oil companies to announce retail prices of petrol in line with the market price. It has also declared that diesel prices “will be market determined in due course.” But the subsidies on “PDS kerosene and domestic LPG will however, continue.” Further, changes in prices in tune with market will be made by PSU oil making companies in consultation with the Ministry of Petroleum and Natural Gas. Simultaneously, government has raised petrol prices by Rs 3.50 a liter, diesel price by Rs 2 a liter in Delhi while the price of domestic LPG has been increased by Rs 35 a cylinder and kerosene under PDS by Rs 3 a liter. 

Doing away with the frequent half-hearted attempts in raising administered prices of petroleum products that led to nowhere, is indeed, a bold step, particularly, when food inflation is hovering around 16% for the past several months. At the same time, we cannot be ignorant of the fact that during the last fiscal year, we spend more than $5 bn on fuel subsidies alone. So, the current move is certainly good for the overall fiscal health of the nation—currently, fiscal deficit stands at 6.6% of GDP, a 16-year high, while the government debt is dangling at a high of 80% of GDP. 

Yet, politically it is a hard sell. So, as anticipated, the opposition parties took to the streets shouting in chorus that deregulation of fuel prices will raise inflation further impacting the life of the common man. In the process, they could ensure that the businesses are shut down for the day, schools are closed for the day, and human life came to a stand still. The net result to the economy is: loss of Rs 40 bn in terms of lost production. 

It is time the opposition parties learn to be realistic in their reactions to the policies announced by the government of the day. After all, aren’t the present policies inflationary? So long as the under-recoveries of the oil companies are financed by the government either by raising taxes or debt from the market, inflation cannot be avoided. Would it not therefore sound better to transfer the increased cost to the consumers themselves rather than distribute it across the economy? It could at least ensure moderation in consumption, which is most desirable for the overall economy, as 80% of the nation’s energy requirement is met through imports.  

That aside, one estimate of the McKinsey Global Institute reveals that there are hardly 55 million Indians—a mere 5% of the total population, who have a disposable income of Rs 2,00,000 and above, which obviously means that it is this 5% of the population that is more likely to be affected by the freeing of petrol prices. Even otherwise, is it justifiable to subsidize the consumption of the elite segment of the society that could afford to buy vehicles worth lakhs of rupees ignoring the demands for investment in such avenues that generate employment to those who are still unemployed, that too, in large numbers?  

Over and above this, a United Nations-backed study by the University of Oxford revealed that poverty in Bihar, UP, Rajasthan, West Bengal, Orissa, MP, Chhattisgarh and Jharkhand was more than in some of the poorest countries of sub-Saharan Africa. It is startling to know that scheduled tribes in the country have the highest multidimensional poverty index (0.482)—almost equal to Mozambique, while scheduled castes have a shade better MPI than Nigeria—clearly demanding governmental interventions to elevate the masses from their current deprivations. As against these stark realities, if the government continues to subsidize energy consumption through budgetary support, there would hardly be sufficient capital left for investing in the much desired interventional programs meant for eradicating poverty from the country.
Isn’t it time for the political parties, irrespective of their affiliations, to stand by the right course to tackle the national priorities?


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