#dnaEdit: Diesel politics

It has been a consistent demand from economists who have been batting for reforms that government should not be deciding oil prices. They have argued that it is an inefficient way of providing subsidy to the common people because it mostly helped the majority who did not need a helping hand, and that there are other and better ways of helping the vulnerable sections. There was the more compelling reason that it bled the public sector oil marketing companies, and widened the budget deficit. Of course, the facts are more complex. But in the public sphere it is the big idea, and not the minutiae, however crucial, that matters. Former Prime Minister Manmohan Singh and former finance minister P Chidambaram were perhaps inclined to decontrol diesel prices, but they restricted themselves to letting go of the control of petrol. The UPA/Congress offered a half-hearted justification that petrol users are in a better position to pay the market price, and that diesel prices needed to be regulated because it had a multiplier effect on things like prices of vegetable and other commodities. Trains and trucks mostly run on diesel. There was also the other argument, which was proffered even by Congress politicians like Jairam Ramesh that by controlling diesel prices government ended subsidising conspicuous consumers like the owners of diesel-guzzling SUVs (sport utility vehicles). It was a persuasive and flippant argument at best.

The NDA government has managed to bite the bullet as it were because the international crude prices have plunged dramatically from near $112 per barrel a year ago to around $80 a barrel now. The timing is perfect. No one is going to feel the pinch. As a matter of fact, the decision has been welcomed by the car industry as it hopes that it will sell more diesel-run cars because the prices have come down. The public sector oil marketing companies are happy that they can now set the price and not suffer losses and fear going into the red. As a matter of fact, the trademark Bombay Stock Exchange sensitive index has surged 400 points on Monday because the PSU oil marketing companies rallied on the basis of the good news. The NDA can also take credit that it means business with regard to economic reforms, and this is supposed to send out a positive signal to international businesses.

There is a good enough argument for decontrolling the oil market, and letting the law of supply-demand determine the prices. It would not, however, be right to be carried away by irrational exuberance because there are unintended consequences which need to be factored in. Global oil prices are low at the moment because of low demand as pointed out in the October report of the International Energy Agency (IEA). That is not good news. The report projected a slight increase in demand for oil in 2015. Perhaps in two years’ time, prices will leap northward. It is to be hoped that the Indian economy will be in a position to absorb price shocks when they happen. And it is not just the SUV-owners who will be affected by higher prices. Prices of vegetables and fruits and other commodities will go up too. Indian economy may possibly have to put up with higher rates of inflation. This could prove to be both tricky and tough for finance minister Arun Jaitley as well as the Reserve Bank of India (RBI). The solution does not lie in remaining in the cocoon of controlled diesel prices. What it implies is that the government, the RBI, the industries, the businesses and the people will have to gear up to cope with market volatility in oil prices. It can be done but it needs nerves to cope with price volatility. No one should develop cold feet at the prospect of rising prices. It has to be remembered that governments do not control the global oil market.