Monday, January 17, 2011

Petro prices just have to increase

Petrol prices have crossed Rs 63 per litre. There is widespread anguish because prices have increased some 28% in the last few months. What is surprising is that this anguish exists amongst the well-read and well-heeled people. There is also a feeling that the government is somehow responsible for this increase in petrol prices.

Nothing could be far from the truth. As everyone knows, the government levies stiff taxes on petrol sales. As a result, the government makes a pile of cash while the public has to pay a lot more. Somehow, people see this as extortion. They feel victimized. They feel this is bad policy. In my mind, this is very sensible fiscal policy. Everyone knows that petrol consumption is mostly in private vehicles. Even here, its mostly in cars. Car owners can surely afford to pay higher prices for petrol. The government does not (and should not) feel any guilt in charging more for petrol.....because everyone knows that usage of petrol should be discouraged. So why do we get some really angry responses from the people?

1) Some people say that government should lower the taxes they charge. Really? And thus pass on the burden to the poorer sections by collecting lesser taxes and having lesser development funds available?
2) Some people say government should keep prices low and absorb losses on its books. Why? Why should the government subsidize the well off segments?
3) Some people think its mismanagement of the government. Somehow they are responsible for the high prices. Why? Crude prices are touching $100 per barrel and surely the Indian government doesnt control crude prices?
4) Some other people feel that crude prices were nearly $100 two years back, but retail petrol prices were much lower. That's correct. But that's because the government was heavily subsidizing the well-off then. Its now subsidizing less. What's wrong with that?

Many other people simply dont understand the issue. The fact is that the government heavily subsidizes all fuel that affects the poor. So diesel still gets a subsidy of about Rs 8 per litre, kerosene about Rs 20 per litre and cooking gas about Rs 375 per cylinder. These three fuels have a high impact on inflation.....and also directly hurt the poor. We should cheer the government in the strategy it is adopting. And yet, most people I know complain about this strategy.

Maybe people dont realize that fuel prices are in the region of Rs 75 to 100 per litre in all countries that are not big oil producers themselves. In most of Europe, its nearly 50% more than in India. In Pakistan and Sri Lanka, its about Rs 75 - 80 per litre. In Hongkong and Taiwan, ditto. Its only in countries in the middle east, and some Latam countries that the prices of petrol are cheaper than in India.

Here's what I complain about. If the government seriously wants to reduce oil imports, it must work at lowering its demand in the transport sector. It must build extensive and efficient public transport systems. Take the Delhi metro for eg. It may take a decade or so, but eventually, the Delhi metro will help reduce petrol consumption (and pollution) in Delhi as more and more people opt for the comforts of a world-class service. Worldwide, governments start planning the metro when a city's population touches 1 million. The metro takes 10 years to make and by the time the population has touched 2 million, the metro is ready. Look at our cities. There is no metro - no matter how pathetic - in cities like Hyderabad, Pune, Ahmedabad and Bangalore (all cities above 6 million pop). The one in Kolkata hasnt had any capacity addition since it was first started. The one is Bombay adds capacity only by making the rakes longer! How long can this go on? Even our bus network is pathetic in most cities. And hence, no one likes public transport in India.

My demand therefore is that the government should dedicate the tax collections accruing from oil to development of transport infrastructure. It should spend the money not on services (bus, train, air), but on building the infrastructure (roads/railway tracks). Its should privatize the bus and train services and force competition to come in. Competition will help lower prices and improve service. Since transport projects dont make much economic returns, the government will still need to provide subsidies, but the subsidies will be lesser than what the government is shelling out now directly for fuel. The development of infrastructure will also help reduce pollution.

The real truth is that people have fuzzy logic. Fuzzy logic is good in machines, but not in humans! Well-read people shouldnt complain about the price of petrol. They should complain about the lack of investment in public transport.


  1. Thx SK! Thx for spending the time on my blog!

  2. Make lot of sense, but why electric cars are not considered? Don’t you think they could reduce the petrol demand in Indian cities?