Petrol Prices have always been at the forefront of the political discourse with politicians throwing around arguments and counter-arguments. Unfortunately, I’ve always believed that prices of such commodities should be driven by pure economics as political involvement in such matters tends to only lead to bigger problems. A case in the act would be to note what the Congress-led UPA-2 did when petrol prices soared under their tenure- they artificially kept the prices lower.
The most important lesson in economics is that there are no free lunches, and thus, as a result of this, when they kept the prices lower, the economy invariably had to pay for this lunch in the form of Oil Bonds, high current account deficits and high fiscal deficits which ultimately led to high inflation, weakening of rupee and above that, a significant slowdown in the growth rate of the economy.
The problem is that they still have not learnt much from their mistakes in keeping the petrol prices artificially low as they continue to blame the government for the increase in the prices as and when it increases. This demonstrates somehow that they continue to look at petrol and diesel prices as a political issue while being completely ignorant of the economic consequences of such an approach.
What is more alarming is to note the hypocrisy of their agenda as when the petrol prices tend to fall, as they have consecutively over the last couple of weeks, they believe it is due to the fall in international crude oil prices. If they blame the Prime Minister for the increase in domestic petroleum prices, then should not they give him the credit for when the prices start falling? After all, when the petrol prices increased due to the rise in international prices then Prime Minister was at fault, now that they’re falling due to a fall in international prices, then Prime Minister must have done something right?
Unfortunately, the politicization of petrol prices serves no purpose towards the larger economic discourse and thus, such analogies are largely redundant as petrol prices have been deregulated to ensure that consumers pay the true price of petrol (I am assuming taxes to be held as constant and within the “true price” as they’re needed for fiscal purposes). This means that the government, especially the central government has little control over when the prices increase (or decrease) because these prices are determined on the basis of movements in the international crude oil prices.
As is the case, it is extremely unfair to blame the Central Government for when prices increase if we won’t credit them for when the domestic prices fall.
The steep dip in oil prices has moderated the domestic prices somewhat but another issue worth understanding is that the Central Government levies a fixed tax on petrol while states levy an ad-valorem (or percentage) tax on petrol and diesel. This means that when prices increase, Central Government gets the same revenue as before, while the State Governments gain more as they tax a percentage on petrol/diesel.
This means that a major share of responsibility to cushion the prices by artificial measures (such as tax rate reductions) if at all required should lie with the state governments rather than the Central Government.
As is the case, the economy suffered due to the reckless spending by the previous government that led to exorbitantly high fiscal deficits and current account deficit that led to a spiralling rupee, high inflation and slow growth or “stagflation”. It is good that the current government has learnt from the economic mismanagement of the previous government and has decided not to follow their irresponsible economic policies driven by clear political considerations.
Thus, neither the credit nor the blame should be attributed to the government for the change in petrol prices and the fact that we can’t blame the government for this should be seen as a sign towards economic considerations triumphing political considerations.
With elections just around the corner, it is refreshing to see a government that is looking at the larger economic interest rather than political gains. This change is the reason why I believe we should give this government due credit while for movements in the petrol prices, all credit and blame must be attributed to the markets!
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.