Deregulation of Oil Prices:

Need of the ‘new’ India

GRK Murty
We have something to cheer about on the reforms front: the
government has at last picked up 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, increases 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
litre, diesel price by Rs. 2 a litre in Delhi while the price of domestic
LPG has been increased by Rs. 35 a cylinder and kerosene under PDS
by Rs. 3 a litre.

Doing away with the frequent half-hearted attempts in rising

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 stood 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 streets singing in chorus that deregulation of fuel
prices will raise inflation further impacting the life of 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 sitting government. 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 mn 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 lacks 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 Oxford

University 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 multi-
dimensional 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 programmes meant for
eradicating poverty from the country.

Isn’t it time for the political parties, irrespective of their affiliations,

to choose the right course to tackle the national priorities?