Friday, June 24, 2011

Angst and politics over diesel price hike.....but what options do we have really?

I cannot understand why there is surprise....and yesterday’s hikes in diesel, kerosene and LPG prices. Everyone knows that the price of crude is at $110 and at this price, it is impossible to continue selling these fuels cheap. Either consumer prices keep going up or the subsidies keep increasing. Either way, the burden is borne by the people. And since there is still a huge gap between retail prices and international crude prices, we should expect more prices in the future. There is no surprise....and no reason for shock.

Sure, there can be differences in opinion in how the higher crude oil prices should be handled. But, as is typical in India, instead of a mature discussion on the subject, the price increase has become a political issue. The opposition parties have cried foul without bothering to explain what they would have done if they were in power. Our media has dutifully reported the opposition’s complaints, without either demanding that they offer an alternative, or suggesting one of their own. In reality, no one is worried about the real issues and the impact on the poor (not themselves), even though they all express shock on behalf of them. In reality, almost all of them are using the price hike as another baton to badger the government with.

While there are no constructive solutions ever offered by anyone, there is one that is usually bandied about by the ignorant and the politically motivated (the opposition). That the government should cut taxes so that consumer prices are not increased. Those who suggest such a solution simply cannot understand that the taxes the government collects from fuel are also used for the benefit of the poor only. The various social programs that the government runs are funded by the various taxes the government collects. Taxes from fuel are an important component of the tax kitty. So if the government cuts taxes, it would suffer a tax loss which in turn would affect the poor people only. If the government reduces taxes from fuels, what would it substitute it with? More income and service taxes? More customs? More Excise? More sales tax? Income tax rates cannot be raised because that leads to more tax evasion. More customs, excise and sales tax is anyways what gives the government the higher taxes.....There is no other major source of tax collection that the government can rely on.....

The TOI has argued that the taxes should be moved from the “ad valorem” formula to “specific duties” (“fixed” taxes). Ad valorem means that the taxes are a function of pre-tax prices. Every time pre-tax prices increase, the tax increases and every time pre-tax prices fall, the tax falls. In an environment when pre-tax prices are climbing, it appears a logical formula to keep taxes intact (have “specific duties”). But what would happen if the pre-tax prices fell? Would the taxes be held intact then also? If pre-tax prices were falling, the ad valorem tax structure would be more beneficial to the public. This is what the newspapers do not realize or don’t want to realize. Whichever system we follow – there will be times when that system will be too tough and others when it will be too lenient. We cannot keep changing the system we follow to suit our convenience, because then that will be arbitrary and will harm us. It will then amount to continue subsidizing fuel prices, no matter what the international prices.

One of the longer term solutions that I would like to offer is to reduce our dependence on fossil fuels. We must rely less on crude and increase dependence on other sources of power. For eg., if our goods could be transported using electric trains rather than trucks, the dependence on fossil fuels could reduce. This would only happen if the electricity itself was produced using non-fossil fuels.....viz. hydro electric, nuclear and non-conventional power sources (wind, tides, sun etc). This is a long-haul solution but one that has no alternative. If we do not reduce dependence on fossil fuels, the prices of petrol, diesel, kerosene and LPG will keep rising every few months.

The easiest and most scalable of non-fossil-fuel based power generation sources is nuclear power. In spite of Fukushima, there is absolutely no denying the fact that nuclear power is the safest source of power. There will be a few accidents in anything that we do. We tend to feel that thermal power plants are safer....because we think they don’t lead to people dying. However, we fail to notice the “slow death” that thermal power plants are wreaking on us.....the pollution that they cause is a major source of global warming. Global warming will kill us slowly and indirectly, but the pollution is killing us daily and directly. It’s human tendency to ignore “creeping degradation” (the Boiling Frog anecdote...remember.....a frog will jump out if thrown in boiling water, but will slowly die to death if it is put in cold water and the water is gradually boiled) while being concerned with “sudden blows”. It’s the same with air travel. Common perception is that air travel is more dangerous than road travel. In reality, air travel is far safer. Every year, more than 1.25 lac people die on the roads in India alone.....this hardly gets noticed, because the deaths happen a few numbers at a time. An air crash on the other hand hogs the headlines because a lot of people die at the same time. We must realize this truism about human nature. We must adopt nuclear power immediately.

The world is now moving towards electric vehicles....again the substitute for fossil fuels is electricity. Electricity generated using nuclear fuels.

If we can convert our power generation and transport sectors from fossil fuels to nuclear fuels, it would give us a lot of protection in the decades to come. That is why the Indo-US nuclear deal was so important. That is why India cannot do what Germany and Italy are doing – scrapping nuclear power plants. Those countries don’t need to increase power production in their countries. They are already fully developed. These countries are growing their economies not by increasing their manufacturing base (which needs more power), but by building “Intellectual properties ( the B2B domain)” and “brands (in the B2C domain)”. They have smartly pushed manufacturing onto the developing world. The problems of pollution are ours to handle. The problems that we in India and China face are vastly different from what Germany and Italy face. We have to be smart about all this; not make even this discussion political.

I don’t blame the people of India for not being able to understand the real issues. I blame the Indian media....which is both ignorant and irresponsible on the one hand, and politically motivated on the other. None of the media outlets in the country are bringing out the real issues that any government would face. Media in India is more interested in the politics. None of them have debates that bring up solutions. They have debates in which everyone blames the ruling dispensation. How would matters be different if the BJP or the Left were ruling instead of the Congress? Would they have kept prices constant? If they had done so, how would they have increased taxes so that the social programs could continue.....or would they have cut the social programs? The media in India has to play a much more responsible role. As an important pillar of democracy, it cannot be so irresponsible and politically motivated.

The real truth is that fuel prices will keep rising. The smart already know it. The ignorant keep complaining every time it happens. The only solution is to switch everything to electricity.....electricity generated by nuclear power. If we don’t do this.....and continue to play political games.....we must be ready to face the consequences.

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