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Article in The Financial Express
Authored by Dr.Jayaprakash Narayan

National Coordinator of
VOTEINDIA movement

For a better tommorrow, see the big picture
(June 30, 2006)

One of the great challenges in any society is increasing administered prices, or reducing subsidies in a politically palatable manner. All democracies wrestle with the problem of reconciling the clash between the short-term political price a government has to pay for temporarily unpopular decisions, and the long-term social good which results from such decisions.

The recent increase in petrol and diesel prices holds a mirror to this classic dilemma. But such a dilemma is not merely the government's problem; the interests of future generations and the whole society are linked to the capacity of a government to take the painful but correct decision. The media, civil society, political parties and opinion makers have the duty to examine these issues and raise the standards of debate.

The oil pool deficit in the current year would have been about Rs. 73,000 crore if prices were not increased to partially offset this deficit. Even then the impact of price increase is only Rs.9,200 crore.

The government also reduced the customs duty from 10 to 7.5% and thus exchequer loses about Rs 6500 crore, reducing the deficit further. The Government is issuing oil bonds to a tune of Rs. 28,000 crore to reduce the oil pool deficit. To that extent, the burden on government increases, except that there is deferred cash outflow. Finally, the oil companies will share a loss of revenue of Rs. 24,000 crore, which in effect is a subsidy to consumers. All these and other steps would bring down the deficit to a manageable level of Rs. 3000 crore. Clearly even with price increase, the government and oil companies are bearing an additional burden of Rs. 52,000 crores, and government is foregoing a revenue of Rs. 6500 crore.

With international crude prices skyrocketing beyond $70 per barrel, any government would have to pass on at least part of the burden to the consumers. Most countries have enhanced oil prices. Britain which imports only 20% of its oil needs, in contrast to our 60%, has priced its petrol at 95 pence per litre (nearly Rs. 82). Most of the nations have realized that global oil prices are likely to further increase as demand continues to grow and supplies stagnate. Over the next few decades we are going to face the severest oil crisis for over a century.

Importing countries have to brace themselves for two consequences of this crisis. First, oil prices need to be increased, as governments cannot absorb the costs. Second, the world's dependence on oil needs to be reduced, and consumers and industry should have an incentive to go for energy efficient technologies, more sustainable life-styles and renewable fuels. Otherwise unmanageable fiscal deficits will force governments to bankruptcy; and societies will suffer grievously as oil becomes costlier and more scarce. That is the reason why even rich countries are also raising prices in the interests of society.

One of the criticisms and concerns raised by our economists and parties is the low tax-GDP ratio in India. Our taxes probably account for 16 - 18% of GDP making it one of the lower shares among large economies. Clearly, better infrastructure, education, healthcare, justice, policing and other public goods cost more money, and low tax base will hurt the poor and inhibit economic growth. If governments give up taxes in order to keep oil prices low, it will only deplete the treasury at the cost of much-needed public goods and services. If other taxes are raised to subsidize oil, it only means that the government is removing the money from the citizen's right pocket and putting it in the left pocket!

Given our low tax-GDP ratio, and the appalling quality of infrastructure and public services, the burden of oil price increase has to be borne by consumers. What we should demand is that every rupee collected is wisely spent by the government for the larger good of our children. Greater transparency, decentralization, accountability, and citizen empowerment must be the watch words.

In fact, the subsidies in energy sector have largely been just dysfunctional and detrimental to the economy. Low price of LPG and kerosene is leading to unauthorized diversion of subsidized LPG and kerosene as automobile fuel. The government is losing an estimated Rs. 15,000 crore per annum in subsidies through diversion. Adulteration with kerosene, which is priced low, is leading to serious environmental pollution and damage to vehicles. Subsidized oil and excise duty concessions on automobiles are promoting private motors leading to more pollution, congestion, higher oil consumption and trade deficits.

But if subsidies have to be given there are two prime candidates. First is high quality, reliable public transport which will reduce oil consumption, pollution and congestion. Second, viable alternative, renewable, indigenous fuels like ethanol. This will pave way to the shift to indigenous fuels and reduce green house gas emissions and global warming, rejuvenate agriculture and put our money in our own people's pockets. Even the US is subsidizing ethanol to promote its production. Brazil is saving vast amounts of foreign exchange by producing ethanol at about $ 25 - 30 per barrel.

Sometimes, being wise and compassionate requires toughness. We need to have a comprehensive review of our energy and pricing policies, and delink government from oil pricing decisions. The market should determine the prices, and all subsidies saved should be used for education, healthcare, infrastructure and alternative fuels. We must focus on long-term energy security, renewable biofuels and reduced dependence on costly, imported oil. Politicians have an obligation to look at the bigger picture, speak truth, and mobilize public opinion in favour of rational policies. If today's transient comfort is at the cost of better tomorrows, our children will pay a heavy price for our thoughtless follies.





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