Fuel Price Hike and Beyond

The most worrying news for the Economists in India is that the inflation rate has increased to a new high of 8.24% on 6^th June. But for the common man, the reason for worry is not this mathematical figure but the trouble this figure has caused to his family budget. The cost of the food items has increased, the price of petrol and diesel has increased, the rate of cooking gas has increased and as a result his family expenditure is taking a serious pounding.

Increase in prices is not a phenomenon that is seen only in India. Prices are on the rise all over the world owing to the increase in crude oil prices and decrease in food production. While the former creates an economic problem, the latter creates a socio-economic problem. Conflicts at certain African nations as a result of food scarcity are an appalling reminder to all nations of the world that failure to contain the food shortage can lead to disastrous consequences. Supply side constraints are forcing all nations to increase the prices of all items including fuels. India, a major consumer and importer of fuels, is also feeling the heat of this cost-push inflation.

The Indian government, after days of deliberations, decided to increase the fuel price some days back. The price of petrol was raised by Rs.5 and the price of diesel was raised by Rs.3. A rise in fuel price can never be a popular decision and this time it was no different. There had been a huge hue and cry on the same and the opposition parties and the left allies of the UPA confronted the government with stiff actions. With the skyrocketing of global crude oil prices, it seems that a rise in the price of petrol and diesel is the only sensible decision the government would have taken.

The opposition BJP and the left parties are saying that they had a magic wand in their hand that could have saved the people from this fuel price hike, had the government asked for their advice and ideas. But their advice had nothing new than reducing the excise duty and sales tax on the fuels. No one put forward the idea of reducing the advertisement expenditure of oil companies to reduce their loss. It is quite irrational that petroleum companies are resorting to high ad spending for their products as there is only a very small competition from the private players in this field. This means that the major petroleum companies, who are all PSUs, are competing with other PSUs without earning anything logically substantial from it.

The central government has reduced some of the taxes on petroleum fuels and has advised the state governments to reduce some state level taxes as well. But reducing the taxes beyond a certain level is not going to be practical as there would be a lot of negative economic implications. A reduction in taxes would mean that there is an increase in the fiscal deficit of the economy and this would result in reduced economic resources with the government to continue its development works and other socio economic tasks. Such a situation would certainly end up in a reduced rate of economic growth and development of the nation which would put a lot of burden on the future generations.

The summit of the G8 nations in Japan has decided not to pile up pressure on the OPEC nations to increase production; instead the G8 countries have decided to increase domestic efficiency in fuel consumption by focussing on technology, conservation and diversification. This is certainly the best measure that can be taken for improving fuel efficiency in a long term basis. But the problem with the rising fuel prices still exists in the short term for which there is no answer available with any of these nations.

So the only option available with us is to take forward the austerity drive about which our Prime Minster is talking about, whereby we should be using less fuel, less electricity and less of other energy sources. We can also think about making use of bio fuels and other conventional energy sources like solar energy or the wind energy. It seems that these times of utter despair is the best opportunity that we have got to pursue some new habits of fuel and energy conservation and for that a concerted effort from all parties and stake holders is imperative.