1/22/2015 Opinion: Why Government Must Not Drop Petrol Prices For Us

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Why Government Must Not Drop Petrol Prices For Us(Ishwari Bajpai is Senior Advisor at NDTV; he has been a journalist for 30 years, and has covered the elections since1984.)

The price of oil has fallen again. The benchmark Brent crude is below $53 per barrel. And besides spooking stockmarkets around the world, it raises the question of whether oil companies will reduce petrol pump prices again or not.Last week, the government did not allow the price drop to change retail prices, instead it raised the excise duty of petroland diesel for the third time in two months to collect revenue. On eight other occasions, it has allowed retail prices to belowered. It seems that the government is finally getting serious about the fiscal deficit. By raising the excise duty on petrol anddiesel again, ostensibly for infrastructure, the Government hopes to collect Rs. 17, 000 crores through these moves. Thegovernment seems to have decided that no further cuts are needed at the moment, and it is more important to focus onthe macroeconomic picture than making the middle class happy.

Of course, the Congress has criticised the government for not passing on the benefits to the consumer. Unfortunately, theCongress is taking an extremely myopic view of the economy, forgetting the problems at the macro level. And the macro picture is not very rosy. Last week, the government was reported to have reached 99% of the Fiscal Deficitfor the FY 14-15, and we still have three months of the year to run. This means that either government controls spendingor gets more revenue or a bit of both. It may also be the reason that RBI Governor Raghuram Rajan has been hesitant tocut interest rates since high fiscal deficits fuel inflation. And as one analyst pointed out, the money being raised by theexcise increases cannot be for building roads - the Transport Ministry has not been able spend its allocations in the lasttwo years, so it clearly doesn't need more money. In fact, it would be a very good thing if the government raised the excise duty further, even if it meant raising the price offuel. And there are a number of reasons for doing so. Firstly, our petrol prices are lower than China, Nepal, Sri Lanka and EU countries, all of whom are major oil-importingcountries like us. So why are we encouraging wasteful consumption? So that people can buy gas-guzzling SUVs ratherthan economical small cars? It does not make sense. The price of petrol (more about diesel later) should be driven notjust by the worldwide price, but also by the need to encourage people to use it economically. Which means keeping theprices up. Since keeping prices up also allows the government to collect greater tax revenue from petrol and diesel, ithelps keep the deficit under control.

Given that there have been articles suggesting that the Government's development plans are going to lead to a breach ofthe fiscal management plan (where the deficit has to be reduced year on year until it reaches 3% by 2016-17), perhapsraising the excise would be a better way to fund the plans than increasing the deficit. There are other serious reasons for the government to keep petrol prices up. The environment is one of them. And whilethis government has been accused of loosening environmental norms for infrastructure needs, it could use extra funds tofinance urban public transport and cleaner diesel (Euro V), both of which would help reduce pollution levels in our cities.To move to Euro V, oil companies will have to spend a great deal to upgrade their refineries and a cess on Diesel would

1/22/2015 Opinion: Why Government Must Not Drop Petrol Prices For Us

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help pay for that. One could argue that this is a subsidy to the oil companies, but if you don't fund them, then they willhave to raise the prices of petrol and diesel anyway to pay for modernizing their facilities.

Public transport in our cities is desperately needed. Delhi is heading towards almost 400 kilometres of metro by nextyear, but it is facing financing problems for the metrobus, and more importantly, it's struggling to keep metro pricesreasonable. Already a long distance ride on Delhi Metro costs Rs. 21 ( with a peak price of Rs. 29) which means anyonetravelling five times a week from home to work and back would spend over Rs. 1,000 per month on tickets. For the sameRs. 1,000 the consumer can today buy 16 litres of petrol which would run his motorcycle 800-1000 kilometres. So whywould the commuter take the metro? Only because s/he cannot afford the capital cost of a motorcycle. All this soundscounter-intuitive. We need, if anything, to subsidise urban public transport, build more metros and have more buses. Carsand motorcycles must be kept at home and used for going out to dinner or shopping, not for going to work. High petroland diesel prices combined with cheaper public transport will do that. (Of course we don't have to go down the MumbaiSuburban route and charge a niggardly Rs. 215 for a monthly pass from Churchgate to Dadar -that pricing has broughtone of the best suburban transport systems to the verge of collapse). Finally, the other reason to keep petrol and diesel prices high is that this low-price regime is not going to last forever.Without too much discussion on the reasons for the current glut of oil and its low prices, suffice to say that low economicgrowth in China, India and the EU, along with a deliberate OPEC policy to discourage further US investment in oil fracking,is not going to last forever. And when prices rise, will the government allow the oil companies to raise the prices at thepetrol pumps or will they like the UPA Government fear a public backlash? Given the fact that we now seem to haveelections somewhere or the other every six to 12 months, it is likely that the government will stall price increases. So it isbetter to take advantage of the current situation of low prices and keep prices reasonably high and collect as muchrevenue as possible.

Assuming that oil prices remain low, the next fiscal would allow the government to collect a hefty amount of cash forfixing the deficit, funding urban and road transport. One caveat - the government should earmark a substantial amountdirectly to these areas rather than letting it all go into the Consolidated Fund of India where the usage is unknown. Disclaimer: The opinions expressed within this article are the personal opinions of the author. NDTV is not responsible forthe accuracy, completeness, suitability, or validity of any information on this article. All information is provided on an as-isbasis. The information, facts or opinions appearing in the article do not reflect the views of NDTV and NDTV does notassume any responsibility or liability for the same.

Story First Published: January 07, 2015 14:37 IST

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