Death by policy
More Sonawane's will die from market distortions
The new Union minister for petroleum and natural gas Jaipal Reddy can implement the brightest ideas from the smartest bureaucrats and yet the root of the problem that resulted in the murder of Mr Yashwant Sonawane, a district official in Maharashtra who sought to curb the adulteration of petrol by the kerosene mixing mafia, will not be touched unless India’s fuel pricing policy is shaped by the logic of simple economics. Various estimates have been provided in the past few days of the size of the domestic black market in kerosene. Some put it upwards of Rs 16,000 crore annually. This is a huge amount of money that can finance large and even globally powerful mafias, not to mention two-bit gangsters like the ones who killed Mr Sonawane. There was a time when Mumbai was in the grip of smugglers. With some simple policy steps like lower tarrifs, liberalization of gold imports and such like these all-powerful mafias were marginalized and largely confined to Bollywood movies. In the case of kerosene and diesel an export smugglers mafia has been created with India’s lower priced fuels smuggled to Nepal and Bangladesh.
Mr Reddy has come forward with several ideas to deal with the problem of petrol adulteration. Few of them are new. Most of these ideas would have been dusted out of old ministry files and presented to him by his officials. Chemical markers for subsidized kerosene and the use of new communications technology may be helpful, and will certainly increase government expenditure, but may not put an end to adulteration and the role of mafia if price differentials between alternative fuels are not reduced. Mr Reddy is not a diehard socialist, nor an admirer of Stalinist bureaucracies. He began his political career as a Swatantrite, an admirer of Bertrand Russel, Chakravarti Rajagopalachari and Minoo Masani. He is more a rationalist than a socialist. His liberal and rational instincts should take him in the direction of rational economics. The only way in which mafias get eliminated is by the elimination of the economic basis for their existence. It is not prohibition that finally ended the power and wealth of bootleggers and illicit liquor mafia but a liberal policy that allowed the sale of properly priced alcohol. This is not to reject or deny the need for proper policing. But, as the Nashik tragedy showed, policing is not an efficient means to address the problem.
As a first step, the government must reduce the price differential between diesel, kerosene and petrol. This will not only have the positive effect of reducing the fiscal burden of the humungous oil subsidy, but also encourage a more rational use of both diesel and kerosene. The under-pricing of these two fuels has encouraged the growth of highly energy-inefficient and environmentally dangerous means of power generation and fuel utilization. Moreover, for an import-dependent country like India subsidized fuel increases the trade deficit and contributes to external payments problems.
Against all such economic arguments there would be socialist and populist views that would flag the cause of the poor. An inclusive democracy like India must offer some subsidy to the poor. However, the gap between alternative fuels and between market price and the subsidized price should not be as big as it presently is between petrol, diesel and kerosene. Conceding the equity argument, we still believe there is a case for reducing the margin. There is no substitute for a rational price policy especially in the case of imported fuels.