Free Press Journal

Fuel price hike: Stay the course


petrol price hike, petrol price, K R Sudhaman, GDP, economy

We know Narendra Modi is like no other Prime Minister but even he relies on voters to get elected to power. And with another general election looming large, it will be hard to resist for anyone in his position to roll back the incessant rise in prices of petroleum products. Price of petrol and diesel on Monday, in Mumbai were a record Rs 86.06 a litre and Rs 78.27, an increase of fifteen paise from the previous day. The comparable figures for Delhi and Chennai were Rs 78.27 and Rs Rs 81.26.

This was the 15th straight increase in as many days, reflecting the policy put in place by Modi soon after coming to power. No sensible person can have an expectation that his neighbourhood kirana shop sell at below cost prices. Small and big businesses all over operate on a cost-plus basis. Therefore, oil marketing companies, predominantly government-owned, should not be grudged cost price, even if they forgo profits. Unfortunately, over the years, successive governments have treated public sector companies as captives, denying autonomy even in matters of end-product pricing. As a result, while OMCs have had to be regularly subsidised by taxpayers.

Consumers of subsidised petroleum products actually inflict the burden on the poor and the weaker sections since higher fisc soon translates into higher inflation. Petroleum subsidies pressure the funds available for education, health and other necessary infrastructure. In other words, subsidising pump prices of petrol, diesel, etc actually slows down the pro-poor development. For, while the corporates, the middle class and a small sprinkling of the poor fortunate to own motorised vehicles gain from below-cost petrol and diesel, the people as a whole have to pay a huge price in slower development of public goods. Besides, it is often ignored that central and State governments and various official and semi-official entities connected with them, account for more than two-thirds of the total consumption of petroleum products. The consumption of petrol, diesel etc by the armed forces and the police and paramilitary services is huge. Therefore, when the pump prices reflect the actual costs, governments share an inordinately high burden.

Having said that, let us also consider a couple of other factors. Given that the US economy is gaining strength, and there is a genuine fear that due to a rise in the interest rates in the vicinity of three per cent, a huge flight of foreign funds in equity and debt instruments cannot be ruled out. Foreign investors have repatriated upwards of $ six billion since the beginning of the financial year. The forex kitty is down by $ 9.49 billion since April this year. Capital flows are slowing down. The burden of an increased outgo on account of crude oil is beginning to impact the current account deficit. With Assembly elections due in Rajasthan, Madhya Pradesh and Chhattisgarh later this year and the Lok Sabha election next year, it is natural for the government to come under pressure. The Opposition parties are already clamouring for rollback, unmindful of the damage it will cause the fiscal situation. How a rising price-line will hurt the ordinary people is clearly lost on those baying for the government to reduce petrol and diesel prices. It follows that those seeking price reduction are indulging in cheap politics.

As for the argument that the component of taxes on petroleum products be cut the answer is the same: it will cut the public purse and to that extent leave lesser funds for spending on vital infrastructure like railways, education, health, roads, shipyards, the whole works. As we said in the beginning, most prime ministers might have already succumbed, but since Modi is unlike no other prime minister, and is determined to rid the system of its bad habits and infirmities, he should stick by his original decision not to go back to the administered price mechanism. He is on test. We hope he will withstand pressure. Let the market forces determine the price of petrol and diesel. Aam aadmi is not selfish. He will understand and probably reward him for his courage. It is the vested interests and the Opposition making noises. On this, ignore them. He will not regret, both politically and electorally.