Why Government Must Not Drop

Petrol Prices For Us

The price of oil has fallen again. The benchmark Brent crude is below $53 per barrel. And
besides spooking stock markets around the world, it raises the question of whether oil
companies will reduce petrol pump prices again or not. Last week, the government did not allow
the price drop to change retail prices, instead it raised the excise duty of petrol and diesel for
the third time in two months to collect revenue. On eight other occasions, it has allowed retail
prices to be lowered.
It seems that the government is finally getting serious about the fiscal deficit. By raising the
excise duty on petrol and diesel again, ostensibly for infrastructure, the Government hopes to
collect Rs. 17, 000 crores through these moves. The government seems to have decided that
no further cuts are needed at the moment, and it is more important to focus on the
macroeconomic picture than making the middle class happy.
Of course, the Congress has criticised the government for not passing on the benefits to the
consumer. Unfortunately, the Congress is taking an extremely myopic view of the economy,
forgetting the problems at the macro level.
And the macro picture is not very rosy. Last week, the government was reported to have
reached 99% of the Fiscal Deficit for the FY 14-15, and we still have three months of the year to
run. This means that either government controls spending or gets more revenue or a bit of both.
It may also be the reason that RBI Governor Raghuram Rajan has been hesitant to cut interest
rates since high fiscal deficits fuel inflation. And as one analyst pointed out, the money being
raised by the excise increases cannot be for building roads - the Transport Ministry has not
been able spend its allocations in the last two years, so it clearly doesn't need more money.
In fact, it would be a very good thing if the government raised the excise duty further, even if it
meant raising the price of fuel. And there are a number of reasons for doing so.
Firstly, our petrol prices are lower than China, Nepal, Sri Lanka and EU countries, all of whom
are major oil-importing countries like us. So why are we encouraging wasteful consumption? So
that people can buy gas-guzzling SUVs rather than economical small cars? It does not make
sense. The price of petrol (more about diesel later) should be driven not just by the worldwide
price, but also by the need to encourage people to use it economically. Which means keeping
the prices up. Since keeping prices up also allows the government to collect greater tax revenue
from petrol and diesel, it helps keep the deficit under control.

Given that there have been articles suggesting that the Government's development plans are
going to lead to a breach of the fiscal management plan (where the deficit has to be reduced
year on year until it reaches 3% by 2016-17), perhaps raising the excise would be a better way
to fund the plans than increasing the deficit.
There are other serious reasons for the government to keep petrol prices up. The environment
is one of them. And while this government has been accused of loosening environmental norms
for infrastructure needs, it could use extra funds to finance urban public transport and cleaner
diesel (Euro V), both of which would help reduce pollution levels in our cities. To move to Euro
V, oil companies will have to spend a great deal to upgrade their refineries and a cess on
Diesel would help pay for that. One could argue that this is a subsidy to the oil companies, but if
you don't fund them, then they will have to raise the prices of petrol and diesel anyway to pay
for modernizing their facilities.
Public transport in our cities is desperately needed. Delhi is heading towards almost 400
kilometres of metro by next year, but it is facing financing problems for the metrobus, and more
importantly, it's struggling to keep metro prices reasonable. Already a long distance ride on
Delhi Metro costs Rs. 21 ( with a peak price of Rs. 29) which means anyone travelling five times
a week from home to work and back would spend over Rs. 1,000 per month on tickets. For the
same Rs. 1,000 the consumer can today buy 16 litres of petrol which would run his motorcycle
800-1000 kilometres. So why would the commuter take the metro? Only because s/he cannot
afford the capital cost of a motorcycle. All this sounds counter-intuitive. We need, if anything, to
subsidise urban public transport, build more metros and have more buses. Cars and
motorcycles must be kept at home and used for going out to dinner or shopping, not for going to
work. High petrol and diesel prices combined with cheaper public transport will do that. (Of
course we don't have to go down the Mumbai Suburban route and charge a niggardly Rs. 215
for a monthly pass from Churchgate to Dadar -that pricing has brought one of the best
suburban transport systems to the verge of collapse).
Finally, the other reason to keep petrol and diesel prices high is that this low-price regime is not
going to last forever. Without too much discussion on the reasons for the current glut of oil and
its low prices, suffice to say that low economic growth in China, India and the EU, along with a
deliberate OPEC policy to discourage further US investment in oil fracking, is not going to last
forever. And when prices rise, will the government allow the oil companies to raise the prices at
the petrol pumps or will they like the UPA Government fear a public backlash? Given the fact
that we now seem to have elections somewhere or the other every six to 12 months, it is likely
that the government will stall price increases. So it is better to take advantage of the current
situation of low prices and keep prices reasonably high and collect as much revenue as
possible.
Assuming that oil prices remain low, the next fiscal would allow the government to collect a hefty
amount of cash for fixing the deficit, funding urban and road transport. One caveat - the
government should earmark a substantial amount directly to these areas rather than letting it all
go into the Consolidated Fund of India where the usage is unknown.