Fuel Price Hike: The Bigger Picture

With the under-recoveries of oil marketing companies soaring, the government is not left with many options but, to deregulate the petroleum prices. Will the government bite the bullet?

History could have been created in Indian politics and economy on 7 June, 2010 if the empowered group of ministers had taken a decision to deregulate fuel prices in line with the Kirit Parikh Committee recommendations. However, absence of 50 percent of those expected to attend the meeting led to postponing of the decision. Moreover, this being a very sensitive issue that shall affect the lives of over a billion people, is bound to take time to come to a conclusion.

The common view on the street if and when fuel prices are hiked would be of blaming the government amidst other inflationary pressures. There can be only two reasons for such a reaction – selfish reasons and/or, a lack of understanding of the bigger picture. The former is something that every individual is guilty of. If the fuel prices are hiked, ‘my’ budget would get upset; what is in it for ‘me’; the government expenses are not ‘my’ concern; I pay my taxes and ‘my’ duty is over, etc. Plausible enough but, one look at the bigger picture and the reactions may change.

Our current fiscal deficit as a percent of GDP stands at 5.5 percent. The government targets to bring it down to 4.8 percent and 4.1 percent in 2011-12 and 2012-13, respectively. Moreover, our country’s debt stands at more than 80 percent of the GDP and the government plans to bring it down to 68 percent in five years. There are only two ways to bring down these alarming numbers – increasing revenues and/or, decreasing expenditures. The former can be done by increasing taxes, a move that the government would not like to consider during inflationary times. Thus, the other option is to reduce its expenses. One such ever increasing burden on the exchequer is oil subsidies. In 2009-10, India spent Rs. 14,950 crore or, nearly 1.5 percent of all government expenditure on oil subsidies, compared with initial estimates of Rs 3,110 crore. That is an overshoot of almost 400 percent!

For a moment, let us shift the focus to a micro level that of a household. Every household has a fixed budget with fixed sources of income and expenditures. If the latter are more than the former, then loans are taken that have to be repaid at a premium price over a period of time in future. If for some reason, the expenses are not brought under control without a corresponding increase in sources of income, then it would become difficult to repay the loan. At times, another loan is taken to repay the previous one. The same process repeats itself and becomes a vicious circle and may even lead to a situation of bankruptcy, if not controlled in time. Thus, the only option is to plug the loopholes in the system, the most important being controlling expenses because increasing sources of income is not as simple as it sounds. This step can be taken only if all the members of the household make some sacrifices in the short-term till the budget is balanced again.

Now, juxtapose the same scenario at the macro level by replacing the ‘household’ with the ‘government’. Our government is already burdened with a high fiscal deficit and national debt. It is high time that it steps up and takes some corrective measures before it becomes too late. This is precisely what the government plans to do by deregulating the fuel prices. The government is ours and only we can help it curb its expenses. A rise in fuel prices may hurt all of us in the short term but, it is for the good of the country in the longer term. Our country has been able to stand firm even amid global crisis only because of fiscal prudence and timely action.

If the fuel prices are not deregulated now, then oil companies would stand to lose Rs.65,000 crore this year. These under-recoveries would be part financed by the government. Since over 80 percent of oil consumed in India comes from imports, if the international oil prices go up, the under-recoveries would increase, adding to the burden of the government and oil companies. Thus, the best way is to let the market determine the price.

There would be no perfect time for such a bold step. There would always be strings attached to such decisions but, the government cannot afford to delay further. It has already lost crores and crores of rupees due to the under-recoveries and it cannot turn a blind eye to it any longer. After all, a stitch in time saves nine.

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About the Author: Shobhika Puri

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