The UPA government has come to power for the second time on the Aam Aadmi card. It still remains an open question that who is the Aam aadmi according to the congress party? Is it the 77% of the Indian population who earn less than 20 rupees a day (According to national commission for enterprises in unorganized sector headed by Economist Arjun sengupta published, set up by UPA government in 2007) or the remaining 20% or less who actually pay Income tax. According to the Budget presented last week by the UPA, it seems that for the UPA, the Aam aadmi is only the income tax paying population.
The last year's Economic survey tabled in the parliament on July 2, 2009 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. Though not exactly in line with ending controls, the government did increase the oil prices in this year's budget. Let us dispassionately look at the rationality of this decision in the given economic scenario vis-a-vis other fiscal policies announced.
According to many experts, the greatest economic problem facing us right now is the problem of food prices. This is very much true. Its sky rocketing and increasingly becoming less affordable to large majority of the population. The fiscal policy announcements in the budget should have focused on this primarily than on other issues. But quite the opposite has happened.
Immediately, the oil prices, particularly the diesel prices should not have been touched.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..
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.
We must note here that the year on year food inflation as recorded in Whole sale price index (WPI) is around 17% now (was at 8% last July). This is a year on year inflation and not with respect to a base year.Strictly speaking the food prices have gone up more than 17% from last year and income of the millions of people have stagnated or has slipped into the negative. This is evident from the negative growth recorded in the farm sector. Statistics show that more than 55% of the farmers are net buyers of food. With data on the net production of grains this year not very certain, the food inflation situation will worsen in the coming months. Climate change and dropping water tables in many parts of south India will only make the things worse. .
The budget did not have anything substantial to revive the farm sector, did not have any policy pronouncement to tackle inflation. Instead the decision on diesel price hike will only fuel inflation and push up the food prices.
But the government has done quite a lot for "its" Aam aadmi by cutting down direct taxes and continuing some irrational exemptions extended to corporate sector. In this year's budget ,Revenue foregone in excise duty — Rs. 1,70,765 crores. Customs duty — Rs.2,49,021 crores. Together with the Rs.80,000 crore in direct write-offs, the total nears Rs. 500,000 crores. All this will benefit at maximum 20% of the Indian population.
Coming back to rationalizing oil prices, was there no option for the government but to increase the oil prices. Or was this the only way to rationalize oil prices. It is agreed that the oil prices must be deregularized for better fiscal management. But given the status of Indian economy, it must be done in a more just and rational manner.
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 de-regularised. 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 increase steeply in the retail market, 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.
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