The Economic survey tabled in the parliament on July 2 says that the government has to consider ending controls on fuel prices to curb demand. This is a very good recommendation and it is high time the government considers this seriously.
Once the subsidy on fuel is removed, If not as expected, but there will be definitely a check on consumption of fuel. High cost of fuel will definitely deter a certain percentage of the population from irrational and lavish consumption.
But the government has to be very careful in implementing this recommendation. Though it is a very good recommendation, it has certain drawbacks in the short run.
Hike in fuel prices, particularly diesel prices will have a cascading effect and reflect in hike in the price of every commodity. Most importantly its going to reflect very negatively on food prices. There will be very steep increase in food prices with deregulation of diesel prices.
Our country is not prepared to face this situation in the short run. We are still a very poor country with millions below poverty line. Lakhs of people sleep hungry every night. Hike in food prices in the short run will be disastrous for millions in our country.
One must note here that the year on year food inflation as recorded in Whole sale price index (WPI) is around +8% now. With not so good monsoon on the cards, the food inflation is likely to hit 14 to 15 % by next march. Measured in consumer Price index (CPI), the food inflation by March 2010 will is likely to be around 25% or even more. If the government thinks of deregulating the fuel prices by then, the food inflation will be beyond control.
But what choices do the government have? Deregulation of fuel prices should definitely be done not only to keep the demand under check but also to control the ill effects of climate change. Broadly the government has two choices.
1)A hike in diesel prices will have a cascading effect and reflect in hike in the price of every commodity. Petrol, on the other hand, will not have such a huge impact on the prices compared to diesel. Hence the government can consider dual pricing of diesel. The price for diesel for public transport, goods carrier and freight purposes can be pegged at rupees 38 or 40 for the next few years. This will not hurt the common man so far as essential commodities are considered.
On the other hand, the subsidy on petrol and diesel for private use must be totally deregularised. This means that the price of diesel sold at retail level for luxury cars must be market determined. Of course his would be an enormous administrative challenge and opens up large windows for corruption. But considering our quite efficient bureaucracy at higher levels, this should be possible.This policy of dual pricing of diesel will have dual advantages.
As the prices of petrol and diesel for private vehicles increase steeply, people will shift slowly to public transport at no increase in cost.This will consequently reduce congestion on roads and help in mitigating climate change.
2)Another alternative the government has is to de-regulate the prices of fuel in a phased manner. B.K. Chaturvedi committee has dealt this issue at length and has laid out a road map for de-regulation.
However, government can immediately de-regulate the petrol prices and slowly de-regulate the diesel prices.
Optimum and efficient use of crude oil is a dependent on the quality of physical infrastructure in a big way. Hence de-regulation of fuel prices (petrol or both petrol and diesel) must be accompanied by meeting certain measurable targets in infrastructure development. Every milestone in deregulation of fuel prices must be commensurate with achieving a certain tangible physical development of durable infrastructure.
Bottlenecks in the supply side of food can be overcome with sound rural infrastructure coupled with good fiscal policies. Unless development of rural infrastructure (particularly roads and power) is given a well meaning fillip, deregulating diesel prices will have negative consequences on millions of people.
Now that "de-regulation" is doing its rounds in the petroleum ministry, there will be pressure on the ministry by powerful corporate houses to hasten the process. The government must refrain from buckling under this pressure and take up de-regulation issue in a very calculated manner keeping all sections of the society and economy in mind.
[My Letter published in Hindu Businessline on the same subject http://www.thehindubusinessline.in/2008/06/10/stories/2008061050590800.htm]
Once the subsidy on fuel is removed, If not as expected, but there will be definitely a check on consumption of fuel. High cost of fuel will definitely deter a certain percentage of the population from irrational and lavish consumption.
But the government has to be very careful in implementing this recommendation. Though it is a very good recommendation, it has certain drawbacks in the short run.
Hike in fuel prices, particularly diesel prices will have a cascading effect and reflect in hike in the price of every commodity. Most importantly its going to reflect very negatively on food prices. There will be very steep increase in food prices with deregulation of diesel prices.
Our country is not prepared to face this situation in the short run. We are still a very poor country with millions below poverty line. Lakhs of people sleep hungry every night. Hike in food prices in the short run will be disastrous for millions in our country.
One must note here that the year on year food inflation as recorded in Whole sale price index (WPI) is around +8% now. With not so good monsoon on the cards, the food inflation is likely to hit 14 to 15 % by next march. Measured in consumer Price index (CPI), the food inflation by March 2010 will is likely to be around 25% or even more. If the government thinks of deregulating the fuel prices by then, the food inflation will be beyond control.
But what choices do the government have? Deregulation of fuel prices should definitely be done not only to keep the demand under check but also to control the ill effects of climate change. Broadly the government has two choices.
1)A hike in diesel prices will have a cascading effect and reflect in hike in the price of every commodity. Petrol, on the other hand, will not have such a huge impact on the prices compared to diesel. Hence the government can consider dual pricing of diesel. The price for diesel for public transport, goods carrier and freight purposes can be pegged at rupees 38 or 40 for the next few years. This will not hurt the common man so far as essential commodities are considered.
On the other hand, the subsidy on petrol and diesel for private use must be totally deregularised. This means that the price of diesel sold at retail level for luxury cars must be market determined. Of course his would be an enormous administrative challenge and opens up large windows for corruption. But considering our quite efficient bureaucracy at higher levels, this should be possible.This policy of dual pricing of diesel will have dual advantages.
As the prices of petrol and diesel for private vehicles increase steeply, people will shift slowly to public transport at no increase in cost.This will consequently reduce congestion on roads and help in mitigating climate change.
2)Another alternative the government has is to de-regulate the prices of fuel in a phased manner. B.K. Chaturvedi committee has dealt this issue at length and has laid out a road map for de-regulation.
However, government can immediately de-regulate the petrol prices and slowly de-regulate the diesel prices.
Optimum and efficient use of crude oil is a dependent on the quality of physical infrastructure in a big way. Hence de-regulation of fuel prices (petrol or both petrol and diesel) must be accompanied by meeting certain measurable targets in infrastructure development. Every milestone in deregulation of fuel prices must be commensurate with achieving a certain tangible physical development of durable infrastructure.
Bottlenecks in the supply side of food can be overcome with sound rural infrastructure coupled with good fiscal policies. Unless development of rural infrastructure (particularly roads and power) is given a well meaning fillip, deregulating diesel prices will have negative consequences on millions of people.
Now that "de-regulation" is doing its rounds in the petroleum ministry, there will be pressure on the ministry by powerful corporate houses to hasten the process. The government must refrain from buckling under this pressure and take up de-regulation issue in a very calculated manner keeping all sections of the society and economy in mind.
[My Letter published in Hindu Businessline on the same subject http://www.thehindubusinessline.in/2008/06/10/stories/2008061050590800.htm]
hey the writeup is good.But i didn't understand the idea behind naming it as "fuel Prizes
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ReplyDeleteThanks chetan. It was a typing mistake. I have corrected it.
ReplyDeleteThis article is good and practically implementable.It needs to be taken forward to the regulatory bodies for their perusal.
ReplyDeletehey nice article :)
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