Oil prices have been hiked and there is as usual political and public outcry. Government hiked fuel prices on the 24th of July 2011 to pass on some of the rise is global crude oil prices to the end user. The hike took some time in coming, as oil prices had risen by over 15% calendar year to date and as a result of which the government’s subsidy bill had gone up to Rs 170,000 crores of which only around Rs 30,000 crores had been budgeted.
Public indignation on high costs of fuel is only to be expected as the public is short shifted by the government on all aspects. High taxes, poor infrastructure, corruption all go into making a common man’s life miserable. However, one of the reasons that actually go into making life miserable for the common man is the subsidy given by the government. Government subsidizes fuel, fertilizer and food. Everyone knows that subsidies are ineffective and go towards fattening corrupt officials or mafia’s than alleviate the misery of the poor.
It is a fact that India is an oil importing country, importing 85% of crude oil requirements and rising oil consumption leads to higher oil imports. Apart from India China has become one of the largest consumer of oil in the World and with China’s car sales topping America’s China will soon be outpacing the US in oil consumption. Rising prices of oil in the global market affects India directly.
The government by absorbing rising oil prices is only adding on to its subsidy bill. The result is a high fiscal deficit leading to higher interest rates, less funds available for infrastructure and no room to reduce taxes. The common man suffers even more due to high oil prices even if it is not felt directly in fuel costs.
Direct pass through of fuel prices to the user results in a lower subsidy bill, lower fiscal deficit, lower interest rate, more funds available for infrastructure and room to reduce taxes. People learn to rationalize consumption when they pay through their own pocket. If the government has more money to spend, public transport infrastructure can improve. There will also be less room for corruption. Once rationalization of consumption gains ground, global oil supply and demand will be more evenly matched leading to prices stabilizing. The benefits of paying for higher oil prices are far more than the benefits from the government absorbing the rising oil prices.
India has to reconcile itself to higher oil prices. It is a one-time shock and once it is absorbed the economy will be on a firm footing. The fact is that India has grown to become Asia’s third largest economy despite oil prices going up from USD 20/bbl to USD 110/bbl over the decade. The economy can absorb higher oil prices but there will be a cost. The cost is not heavy if the country can actually use the high oil prices to good effect. The country has to learn to rationalize consumption so that oil consumption does not threaten the economy’s stability.
Once oil consumption becomes manageable, the country can devote its resources to developing new fields and moving towards alternate energy sources. The government cannot drive people to rationalize consumption; it will have come from within.
The next time you drop you child to school in your car, do remember you are contributing to high oil prices.
