Is increasing diesel price better than keeping it static?


By

Dr. Prafulla Kumar Das
Professor
Regional College of Management
Chakadola Vihar, Chandrasekharpur, Bhubaneswar-751023

Res: HIG-10 (Model House), Baramunda Housing Board Colony,
Near Trinath Market, Bhubaneswar-751003
E-mail: dasprafulla@rediffmail.com
Ph. 0674-6523254 (R), Ph. 08093791005 (M)
 


ABSTRACT

Swaminathan S. Ankalesaria Aiyer wrote an article in the Economic Times on 02.01.2013. He discussed one research outcome which could mathematically prove that the diesel price hike would affect the common man less than keeping it at a constant price. The research argues that budgetary provision of Rs 2000 billion in 2013-14 would increase the fiscal deficit beyond manageable limits.  To cover the gap, dollar borrowing would bring down rupee value leading to costlier imports and inflation. If the losses borne by the Oil Marketing Companies in India are not covered, it would lead to depression; diminish money supply, reduced industrial production and employment. To come out from the trap, the safer option would be, according to Swaminathan, to increase diesel price slowly in installments which the Government of India accepted.  But the author thinks otherwise.

Keywords: Inflation, current account gap, dollar borrowing, budgetary provision, fiscal deficit, diesel price hike.

Back-ground

Swaminathan S. Ankalesaria Aiyer wrote an article in the Economic Times on 02.01.2013. He successfully touched a sensitive point of slowly scaling up diesel price every month by a rupee for next ten months. He discussed one research outcome which, through a complex mathematical derivation, could prove the general belief otherwise. The research proved that the hike in diesel price would affect the common man less than being kept at a constant price. The research showed that 30 per cent rise in diesel price in one go would increase inflation by 5.6 per cent in four years whereas if the Government of India kept on covering the losses borne by the oil marketing companies, the inflation would go up by 7.5 per cent during the same period. The subsidy bill for the fuel stands at Rs 200,000 Cr or Rs 2000 billion in 2012-13. This comprised about 2 per cent of GDP of India for 2012-13.  The research argues that budgetary provision of Rs 2000 billion would increase the fiscal deficit beyond manageable limits.  To cover the gap dollar borrowing would bring down rupee value leading to costlier imports, which on the other hand, would push up inflation and general price. If the losses borne by the OMC are not covered, it would lead to depression; diminished money supply, reduced industrial production and employment. So, the Government of India has been in a trap. To come out from it, the safer option would be to increase diesel price slowly. Following the recommendation of Swaminathan and similar such economists, the Government of India probably took steps for raising diesel price by Rs 0.50 per month. It (the Government of India) is also mulling over the idea to increase the cooking gas price by Rs 10 per month or Rs 25 every three months (The Samaj, Bhubaneswar; 27 August, 2013).

Complexity of economic outcomes

But, the complex mathematical research discussed by Swaminathan was proved to be not correct. The rise in inflation (may also be due to additional reasons) has been significant from 4.58 per cent in April, 2013 to 5.79 (www.tradingeconomics.com; Ministry of Commerce and Industry) in June, 2013. Swaminathan knows that economics like any other social science subject is not predictive. So, it would be prudent if top economists adopt restraint while making prediction. That would benefit the country as well as the common man whose voice has been suppressed under the carpet.

Swaminathan discussed about the bad impact of furnace oil decontrol on environment and on diesel price. He also discussed consumerism leading to more demand for diesel cars. But, assailed the general belief that diesel price hike would push up prices of commodities to unmanageable limits. He was probably in favor of diesel price decontrol. He quoted the examples of nations like the US, the UK, Germany and Singapore where diesel price decontrol did not affect inflation.

The language of economics has been elusive even to intellectuals (let aside the common man). The common man understands the amount he pays for purchasing his daily necessities. If a Government could provide price stability mostly in daily necessities, it would be great for him. But, unfortunately, the entire energy of economists has been spent for explaining the cause and effect of inflation and how it would not affect people as expected. The greatest contribution of economics to the mankind would be to bring out the permanent solution to the problem i.e. price stability. Manipulating price index to show lower rate of inflation, complex derivatives to predict future price of a commodity and amount of benefit the purchaser of a policy or share would derive from the purchase, forcefully going against a smoothly operating system which does not favor market economy, and again saying against that (changed economic system) to introduce another change probably take away the entire energy of market economists.

Price stability for self-reliance

Swaminathan also mentioned how newer and newer jobs are being created daily to manage the consequences of change. But, he forgets to discuss the disease - poor governance - leading to poor quality of life for the people in the society. A stable price can only be achieved through a stable currency and strict control over the lure for extra profit. The entire theory of modern economics is based on free and fair competition. But, who would ensure it and how? Is it through trading? If not, is not it through strict control over the reasons of price instability? If yes, will it be termed red-tape against growth?

Let us come to the politics of economics. The debate area is: whether to go ahead with diesel price hike or stabilizing it? The answer of stable price lies in the stable currency. The currency would probably remain less fluctuating in the present floating rate context if India's current account deficit is bridged. It can be done through either increasing exports or reducing imports or both. Increasing exports on the part of a newly independent nation is difficult. The only option, on the other hand, would be to reduce imports and to promote self-reliance in the areas of import dependence. In fact, they have to be done simultaneously. Preparing a priority list for imports, though desirable, is challenging.

Going back to APM days

Why are the leading economists not discussing on oil pool account? The administered price mechanism (APM) was working well and the oil companies were adjusting their deficit through cross-subsidization. Just three years after the dismantling of oil-pool account, in 2005 the Government of India was thinking of going back to the Oil industry development board (OIDB) era or APM era. What made them to remain stay put?  Probably, during the time when Dr. Manmohan Singh was the finance minister, the diversion of oil-pool money was started to bridge budgetary deficit which gave it a bad name. Ultimately, during the period of Vajpayee Government, oil pool account was dismantled and the entire responsibility of loss due to subsidy on petroleum energy fell on budgetary allocation. While from 1974 to 1995, only Rs 902.40 Cr or Rs  just Rs 9.24 billion was given to oil marketing companies for managing their deficit from the total collected amount of Rs 23,228.50 Cr or Rs 232.285 billion, there was no funds transfer to OIDB during the three years ending March 31, 1995. The government had been collecting an oil development tax on indigenous crude oil. There was periodic increase in tax. The tax so collected was meant to be given to the OIDB for the growth of oil industry. After the breaking down of oil-pool account, the entire deficit of Rs 200 thousand Cr or Rs 2000 billion would have to be allocated through budgetary provision.

Why are the economists not discussing curbing the use of subsidized diesel? The rich is not paying for the subsidy bill for his entire consumption. Rationing of individual use of diesel would probably discourage the rich to use oil guzzlers. It should have come before pruning cooking gas subsidy.

Emphasizing energy research

In fact, energy research should have been directed for developing alternate sources of energy and improving engine efficiency of existing vehicles. In the present context, car purchase by an individual may have been linked to one's income and the presence of a garage to park it. Use of public transport, development of hybrid vehicles and vehicles running on battery; emphasis on eco-friendly houses through design (with proper inlet of air and sunlight) should be encouraged. Discouraging life-style products like air-conditioner, refrigerator and other appliances those consume more of electricity may be beneficial to the society. Increased use of molasses would have some positive effect on import substitution of petroleum energy. In totality, a holistic approach would be the key to reducing petroleum import, the major contributor to current account deficit in India. Whether inflation would be less or more owing to increase in diesel price, the debate would go on. But, inflation is bad for the common man and should be kept under tight control by the Government.

[Views expressed are of the author. The author has no conflict with Mr. Swaminathan S. Ankalesaria Aiyer. The topic only tries to highlight the social outcome of inflation due to diesel price rise in India. Contact: dasprafulla@rediffmail.com]

REFERENCES

Archana Chaudhury, Government plans return to oil pool account, available at: http://articles.economictimes.indiatimes.com/2005-09-02/news/27485117_1_oil-pool-marketing-companies- price-mechanism, downloaded on: 21.03.2013

Cooking gas price to increase by Rs 10 per month! , The Samaj, Bhubaneswar; 27 August, 2013

Current account: Available at: http://en.wikipedia.org/wiki/Current_account downloaded on: 16.02.2013

India inflation rate, www.tradingeconomics.com; Ministry of Commerce and Industry, Government of India; downloaded on: 22.08.2013

Inflation, available at: http://en.wikipedia.org/wiki/Inflation, downloaded on: 21.03.2013

Keshaw Kumar Sahu, How to Deal with High Oil Prices?, available at: http://www.indiabix.com/group-discussion/how-to-deal-with-high-oil-prices/, downloaded on: 21.03.2013

Kimberly Amadeo, Current Account Deficit, Available at: http://useconomy.about.com/od/glossary/g/Current_Account.htm downloaded on: 16.02.2013

Sushil Nanda, 7 most harmful effects of Inflation on different aspects of a developing country like India, available at: http://www.preservearticles.com/201102073974/7-most-harmful-effects-of-inflation-on-different-aspects- of-a-developing-country-like-india.htm, downloaded on: 21.03.2013
 


Dr. Prafulla Kumar Das
Professor
Regional College of Management
Chakadola Vihar, Chandrasekharpur, Bhubaneswar-751023

Res: HIG-10 (Model House), Baramunda Housing Board Colony,
Near Trinath Market, Bhubaneswar-751003
E-mail: dasprafulla@rediffmail.com
Ph. 0674-6523254 (R), Ph. 08093791005 (M)
 

Source: E-mail August 27, 2013 / September 05, 2013

          

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