Getting prices right

Damned if you do, damned if you don't

The Union government has brought the protests against the the fuel price increase on itself by opting for a one-time sharp price escalation over gradual and graduated increases in response to global market trends. It is understandable that there would be some amount of public resentment, and that opposition political parties would try to exploit that. However, the government has a strong case, especially for increasing the prices of kerosene, diesel and LPG, so it should educate public opinion, defend itself and stay the course. The Union government should have known that it would be damned if it increased prices and damned if it didn’t. India cannot endlessly afford the luxury of subsidising energy, especially imported energy. Moreover, as the crimes of the so-called “kerosene and diesel mafia” show, the real beneficiaries of such subsidies have been criminal elements who have adulterated petrol with diesel and kerosene and diesel with kerosene, exploiting artificial price differentials. Getting prices right is important particularly in the case of fuel and gas, from several viewpoints including balance of payments management, environment protection and ensuring low carbon development, and reducing adulteration and related criminal activity. The protests by the Bharatiya Janata Party (BJP) are hypocritical considering that it was a BJP-led government that sought to dismantle the administered price mechanism to bring some market rationality into energy pricing in India.

Most consumers are rational and tend to accept rational price increases. That there was not much protest against the last round of petrol price increases suggests that petrol users in India follow global trends and understand that India was out of line with not only the world but also her poorer neighbours in south Asia when it did not increase fuel prices in response to global trends. Even so, it would have been better for political and administrative management of such a sensitive commodity if price increases were gradual and graduated, not sudden and sharp spikes. The latter tend to shock middle-class consumers more than a gradual but secular increase in prices.

While the Union government has been trying to make amends for its sins of omission, it chose to commit a new sin of commission by cutting customs duties in the name of compensating the consumer for the price hike. Curiously, this fiscal measure may eventually benefit private-sector oil companies, especially those that import crude oil to export refined products! The Union government’s misplaced gesture was compounded by the Congress high command’s instruction to state governments to sacrifice much-needed revenues in the name of fighting inflation. The West Bengal government was quick to respond despite the fact that the state’s finances are in dire straits. Several state governments have followed this bad example. Why should state governments sacrifice revenues, especially if they are already fiscally stressed, in response to a market-related increase in the consumer price of a scarce commodity? It doesn’t make sense. India needs a forward-looking fuel price strategy that will ensure the domestic price for energy is not out of line with international prices and that the necessary adjustment is done through the free expression of market forces rather than administrative and political fiat.