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Raising Diesel & LPG Prices - A Correct Step?

Pravin Luharuka 
on 19 January 2013

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Many announcements have been heard from the current government in the past 15 days. The current regime seems to have suddenly taken a performance enhancing drug for they want to make up for the lost time and do something fruitful in order to reiterate their claim "We are an Aam Aadmi Party." 

One of the significant announcements in the recent past have been raising prices of Diesel and LPG cylinders in order to reduce the fuel subsidy bill of the government. The call by the government has been slammed by the two sets of critics- one being the opposition who have to criticize every move of the party in power and others being people who criticize in order to prove their understanding and  thereby their intellectuality on the subject. Nonsense! Criticism is done in order to create a healthy debate and find a solution on the issue. Digging a grave for the issue just to prove your political might can never succeed a nation, a young nation in our case. Estimates show that the government would be saddled with a subsidy burden of `166,000 crore for keeping the diesel and LPG prices at an artificially low level. Oil Marketing Companies are losing money as they are selling fuel at low prices and the prices are not market oriented. We have to understand and analyze the logic behind this step before raising our voices. Let us try and understand the issue.

The current difference between Market Prices of Diesel and Subsidized prices is Rs.9 per litre, a difference of more than 20%. The difference between Market Prices of LPG Cylinders and Subsidized prices is even more startling, a difference of  Rs. 490 per cylinder. Who is paying for the burden of OMCs? The answer is the Government in the form of fuel subsidies. What is the source of Government Revenues?

The primary sources of Income are Direct and Indirect Taxes, Auction of Scarce Resources (read spectrum), Foreign Direct Investment and Disinvestment. Disinvestment programs have been a total flip flop in the current fiscal and not even half of the budgetary targets have been achieved till date. Future being uncertain seems all the more in this case. Current Global scenario, courtesy the US and the European nations, along with complex government policies have made big ticket investors stay away from FDI. Even auction of spectrum has failed to fill pockets of the government. Therefore, who is funding the money to the Government to cover this huge subsidy bill? The answer is us, the Aam aadmi.

A layman's perspective would be sufficient to understand the issue. The claim by the experts on the issue is that the current move of the government would be inflationary and the fore should be scrapped. The government needs the money in order to cover the subsidy and therefore since options are limited it borrows from the open market. This market is from where we and our industrialists are supposed to borrow. Government borrowing leads to shortage of funds in the money market and thereby we have too many people chasing too less money in the market. In economic terms, demand outwits supply thereby raising price of money which in this case is the interest rate of borrowing. The expensive money in turn raises production cost of the manufacturers which is passed on to the end consumers. The resultant effect is inflationary as well as it raises prices of commodities which we buy. If we analyze the current scenario are we not stuck in this type of vicious cycle?

We are paying more for everything we buy because we are forcing our leaders to keep the prices of inputs artificially low. Does that make sense? Market linked prices have always been beneficial because first and foremost it removes all the artificial barriers and secondly it promotes better utilization of resources. Whether such a move will be inflationary? Yes in the short term, because high price of diesel and cooking gas will have a weighted effect on the inflation. However, in the long run, this effect will be minimal as prices will adjust according to the demands of the market. We the end consumer knowing that no freebies are at hand will not misutilize the scarce resource that we do now, thereby doing something good for our future generations.

From: Pravin Luharuka

Email: pravin.luharuka@gmail.com & pravinluharuka.blogspot.in)




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