Why PM Modi must be lauded for his smart and bold oil pricing

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Apoorv Pathak

@apoorva2pathak

The crude oil prices plunged below 30 dollars a barrel last week, settling below it for the first time in 12 years. On 26 May 2014 when Modi took oath the crude oil prices were 108.56 dollar a barrel and retail prices of petrol and diesel were priced at Rs 80 and Rs 65.21 a litre in Mumbai respectively. Now after over 70 % fall in crude prices, the retail prices have declined less than 30 % to Rs 66.09 and 51.25.

The reason for the fall in crude prices not translating into equivalent fall in retail prices has basically been the frequent rise in excise duties by Modi government. Clearly Modi government has consciously chosen not to pass on the benefits of reduced crude oil prices to consumers.

This has generated a lot of political ridicule by opponents and even some supporters who have dug out old populist statements of senior BJP leaders ridiculing the then UPA government for making oil expensive. While there is merit to the charge of hypocrisy against BJP (who can forget the Bharat bands BJP used to enforce when Oil prices were hiked), their is a need to realise that Modi governments oil pricing strategy is actually wise and brave in many ways.

It’s a strategy which kills many birds with one stone. Though it reduces consumers’ disposable income at a time when increased consumption is desperately required, the benefits of this strategy are far more consequential as one will realise from the following discussion-

Fiscally and economically wise

India’s nominal growth is projected to grow slowest in a decade with only 7.4% nominal growth registered in the April September quarter against the budget expectation of 11.5 for the year. Corporate sales too have stagnated. Since government tax growth is dependent on nominal growth, the government is having a hard time sticking to its revenue projections. The only silverlinning has been that it has garnered nearly 1 lakh crore in excess taxes by raising the excise duty on oil. This additional revenue has then been channeled in investments in roads and highways giving a boost to stagnating demand and job creation.

Also it has allowed India to avoid either slashing expenditure or reneging on its commitment to fiscal deficit target. This has made India shine out as a heaven of stability in a global environment marked by instability and turbulence. This fiscal certainty and stability is why India weathered the long dreaded federal rate hikes with relative ease when it finally came.

So were it not for the government’s brave decision of keeping with it the benefits of falling oil prices, India would have had higher fiscal deficit, lower global confidence in it, lower public investment in infrastructure and perhaps some other new tax which would have been much more painful.

In short, even to imagine an alternative is a nightmare, but if Modi government had been prisoner of past oil pricing policy the nation would have surely faced such a nightmare.

Rare case of political foresight

By not translating the low crude oil price into similarly low retail prices, the government is avoiding creating expectation of too low prices among the electorate. This is important, as when the oil prices recover, which will likely be near the end of this government’s term when it will have to be worried about facing an election, the government can avoid giving people a price shock by raising prices modestly and instead reducing the duties on oil, leading to lesser and more manageable rise for the electorate. Also since the electorate would not have become addicted to dirt cheap petroleum prices, it will find less difficult to manage the modest rise. Thus BJP should swallow the insults hurled at it today and persist with this oil pricing policy, happy in the foresight that when it counts, i.e during election time, this policy will provide plenty of joy to the party.

Environmentally sound

Oil consumption is one of the most prominent sources of pollution and greenhouse gas emission. Today when pollution in indian cities and climate change have become such pressing issues, any attempts to lower the oil prices would have made the situation worse by incentivising more consumption of oil and shifting people away from public transport to private ones. This is why it is environmentally a prudential decision to tax heavily carbon goods like oil.

If one sees more taxing of oil in light of consequently higher investment in infrastructure(reducing jams, increasing fuel efficiency, cutting time and distance between places) and an emphasis on solar energy, it makes for more responsible environmental policy.

Price Stability

The oil prices have been declining continuously, defying expectations of many observers. By keeping the retail oil price largely stable, Modi has ensured that the uncertainty and costs (“knwon in economics as MENU COST”) arising due to price instability is avoided.

Counters disinflation

Suppressed rural demand due to rural distress, downturn in global commodities prices, struggling global demand and excess capacity with producers are factors which are creating disinflationary pressures in indian economy despite high food prices. Now, if oil prices for consumer were to also start sliding, the disinflationary tendencies can get strengthened as oil is an important input. In such a condition by holding the oil prices for consumers to a fixed level Modi is countering disinflationary pressure. And as disinflation is not conducive to economic growth or stability it is wise of our government to reduce its possibility.

In light of all the above discussed factors it becomes clear that Modi government’s unorthodox oil policy is a perfect example of the smart and bold steps for which Modi was voted to power. The political opponents of the government should rise to the occasion by not opposing anything and everything for the sake of opposition. Well intentioned yet misguided policies like the oil price of previous government have long held back India, a new India can no longer keep doing the same thing which failed repeatedly.

For Modi to have so boldly chosen to tread a new path on oil pricing is a laudable step that puts national interest over his own political interest and deserves our wholehearted support. One just hopes Modi owns up this strategy publicly and communicate it to the masses so that a new enlightened consensus on oil pricing can replace the mistaken one of the past.

The author has studied in IIT-Roorkee. The views expressed here are author’s own.

4 COMMENTS

  1. Even though you are right in your analysis but I defer with the conclusions that its good for the economy to have higher oil prices. Just think this way. If domestic oil prices were lowered as per international prices then because of lower WPI and CPI RBI would have been in a pressure to reduce rates to boost the economy and the prices upwards which in turn will give more money in the hands of people on and above the money they got from Oil savings. This would have created organic demand in the economy and money going out from other emerging markets would have come to India looking at prospects of faster GDP growth. By not letting oil price to go down domestically what Modi govt is doing is Investing in Longer term expenditures by ignoring short term needs. This will delay the Investments in India by overseas Investors. This will make us loose the competitive edge we got over other economies for now.

  2. Agree with all your points but was BJP completely unaware of these things while in opposition? Shouldn’t BJP leaders apologize for all the drama (Bharat band, protests and abusing then PM…)?

  3. Does not justify the reason for not passing on the benefits of oil price slump. If the prices have falled 70% and public is only getting 30%, this is simply called looting by Govt. Falling oil prices even though short term would benefit the economy because the cost of goods would come down and common man would be able to afford some few “luxuries”

  4. the problems is all essential commodities is let loose to the market to be gambled by the traders so the price of essentials are not in any control and its benefited ones will not allow any one to touch that.

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