[Reader-list] Petrol prices

[S. Jabbar]

Worried about rising fuel costs? Here¹s an interesting piece that was
published in the Indian Express a couple of days ago. Hope this will make
people think twice before joining the ranks of the whiners.
Best
Sonia Jabbar


Perverse Subsidy for the Rich
By Atanu Dey

Nobel prize-winning economist Douglass North observed that ³economic history
is overwhelmingly a story of economies that failed to produce a set of
economic rules of the game (with enforcement) that induce sustained economic
growth.² Producing a set of rational economic rules is a political rather
than an economic process. Frequently basic economic truths are willfully
disregarded in a myopic but cynically calculated process of short-term
electoral gains. In the long run, however, the persistent practice of
politically motivated economically unsound policies has the unsurprising and
unfortunate effect of impoverishing the economy.

India is a case in point. Despite being endowed with substantial human and
natural resources, it has failed to provide a vast majority of its citizens
the basic necessities for a decent life. It is hard to avoid the conclusion
that what India mainly lacks is a rational set of economic rules. An
important contemporary example of a flawed economic policy is the subsidy
that the consumers of petroleum enjoy.

The price of a barrel of crude is hovering around US$ 100 a barrel and yet
the price of petrol at the pump remains essentially what it was when crude
was selling at half that price about a year ago. The resultant gap between
the cost and the price has to be bridged through a subsidy that is estimated
to be around Rs 70,000 crores this year. The case is made that by keeping
the price artificially low, the so-called ³common man² benefits. But that is
certainly not the case. It is a perverse and regressive subsidy for a number
of reasons.

First, it is the ³uncommon man² who actually benefits directly from the
subsidy. In fact, the wealthier you are, the more vehicles you own, the more
subsidy you capture. For every litre of petrol or diesel you consume, you
benefit by around Rs 10; for every cylinder of LPG, someone else chips in Rs
250. The really poor person does not own cars nor has a gas connection.

Second, when distorted low prices do not reflect the full costs, it sends
the wrong signals and consumption is more than is socially optimal. India
meets about three-quarters of its petroleum needs through imports at an
approximate cost of US$ 50 billion a year. Increased consumption inflates
that import bill and is economically wasteful.

Third, the burden of the opportunity cost of the subsidy falls squarely on
the people who cannot reap its benefits. The resources that the subsidy
consumes are not available for services that the poor benefit from such as
subsidies for public transportation systems, primary health and education.

Fourth, the subsidy is financed by bonds issued to oil marketing companies.
These bonds represent a future liability. Essentially it is a mechanism
employed by the present voting generation to secure benefits that will be
paid for by the future generations who do not have a vote and therefore do
not have the option to reject that burden.

Fifth, if prices were more aligned to true costs, alternatives such as
better public transportation system can have a fair shot at being developed.
It would also send the right signals for more conservative use of private
cars, leading to less congestion and pollution.

The basic economic truth is that there is really no such thing as a free
lunch. Today¹s subsidy comes at a cost that will only grow larger the longer
the delay in pricing petroleum products at full cost. It is fairly simple to
remedy the situation. Raising the price at the pump is the simplest but the
most politically risky. The UPA government knows that and will definitely
not risk losing power even if raising prices is for the larger benefit of
the economy.

But those subsidies have to be reduced, if not totally abolished overnight.
A start could be made immediately to reduce the subsidy to the rich while
continuing it for the poor. A mechanism for doing so would be to impose a
tax on car owners which would reflect the full cost of the petrol they use.
Depending on the size of the engine and average fuel consumption, an annual
fee could be assessed which has be paid to maintain registration. So if a
particular make and model of car typically consumes, say, 1,000 litres of
petrol a year, the tax could be Rs 10,000.

This type of a mechanism would leave all two-wheelers, three-wheelers, and
buses untouched. Since it is usually the common man who uses public
transportation, the common man would continue to enjoy the subsidy.

Implementing rational economic policy is not impossible for India even
though for decades on end we have been burdened with flawed policies. We are
moving slowly towards a more rational way of running an economy. Whether we
persist on along that path is a political matter which can only be
determined ultimately by the enlightened self-interest of an educated
population.

For more see Atanu Dey¹s blog: deesha.org