Introduction:
Government of India has always been striving for the betterment of India and its people, and has been taking various steps to take India to the genre of developed countries via its Planning Commission, Five Year Plans and its Annual Budget Policies. Taking in view nation’s need to develop its infrastructure, industries and agriculture, Govt. of India had been subsidizing the prices of fuel, i.e. petrol, diesel, kerosene and LPG, considering it an important entity for growth, and hence insulating it from the international fluctuations and high prices. This made fuel easily available at affordable rates to every Indian, from household use to agricultural demands of farmers and for transportation throughout the country.
However on the recommendations of Dr. Kirti Parikh Committee setup by Planning Commission, on June 25, 2010, Finance Ministry announced the slashing of subsidies on the prices of Petrol resulting in an increase of Rs. 3.7/l and also announced a price hike of Rs. 2/l on diesel and Rs. 35/cylinder for LPG. It is also speculated that the prices of diesel and LPG will also be decontrolled in near future.
This decision was taken with mixed opinions of likes and dislikes. We shall discuss in detail it various effects on people and various sectors of industry.
Government of India has always been striving for the betterment of India and its people, and has been taking various steps to take India to the genre of developed countries via its Planning Commission, Five Year Plans and its Annual Budget Policies. Taking in view nation’s need to develop its infrastructure, industries and agriculture, Govt. of India had been subsidizing the prices of fuel, i.e. petrol, diesel, kerosene and LPG, considering it an important entity for growth, and hence insulating it from the international fluctuations and high prices. This made fuel easily available at affordable rates to every Indian, from household use to agricultural demands of farmers and for transportation throughout the country.
However on the recommendations of Dr. Kirti Parikh Committee setup by Planning Commission, on June 25, 2010, Finance Ministry announced the slashing of subsidies on the prices of Petrol resulting in an increase of Rs. 3.7/l and also announced a price hike of Rs. 2/l on diesel and Rs. 35/cylinder for LPG. It is also speculated that the prices of diesel and LPG will also be decontrolled in near future.
This decision was taken with mixed opinions of likes and dislikes. We shall discuss in detail it various effects on people and various sectors of industry.
How did it used to work, and the inside glance:
The prices of crude petroleum are decided on the basis of international demand and supply charts and keep fluctuating. The prices have soared up to all time high of $146/barrel in recent pasts and currently are around $75/barrel for crude oil. This is equal to Rs 22/litre approximately. After refining costs and various taxes and levitation costs, the prices reach what they are in market. But Govt. of India puts a cap on the Base selling price for companies and also reduces various taxes to overall decrease the rates. This is done to provide a boost to various industries and agriculture. But as analyzed by Parikh committee, this led to high losses and under recoveries incurred by public sector companies summing up to more than Rs. 250 crore per day. Moreover under the shared subsidy arrangements, a large chunk of these losses were replenished from the coffers of Indian Government itself, thus causing an indirect loss of people via taxes.
Good news:
The first and foremost beneficiaries of this decision would be the National Oil refineries and Oil Trading companies, which will be able to recover their fiscal deficits due to rising gaps between international and domestic fuel prices. The decision will lead to decrease in the under-recoveries by almost Rs. 25000 crore per annum, which will boost the ability of oil firms for exploration of oil reserves in domestic fields and acquisition of international assets. Various private companies like Reliance, Essar and Shell will also be able to enter the market of Oil Trading hence increasing competition.
The decision will rein in the fiscal deficit of government by more than .6% of GDP, and the savings would be utilized in providing better facilities to people and various other development schemes. The fiscal deficit management will give a high stability to India economy in global markets.
Even the auto-industry hailed the decision of decontrolling prices. Increasing diesel prices will now discourage use of diesel cars, as the real reason behind subsidy was to facilitate transportation of various commodities and not personal and household usage. Even their will be a shift of freight movement from trucks to railways, which consume 4 times lesser fuel. It was studies that trucks and buses accounted for 49% of diesel consumption while only 12% was used for agriculture.
Another very important impact of this fuel price hike is an incentive to people to reduce their energy usage and switch to other non-conventional renewable resources of energy. This will be a major step in resolving the fuel crisis and would serve as a timely measure to adapt to the fast depleting fuel reserves on earth. This will serve as a wakeup call to all those who had taken the generosity of government and subsidies for granted. Using energy from wind, water and sun, and decreased number of small cars and increased use of public transport will solve a number of issues, like pollution, road traffic, energy crisis, and will also serve as a source of income to government and employment to people in public transport sector.
Criticism:
An immediate effect noted out of price hike announcement is the inflation. The finance ministry's chief economic adviser estimated that the deregulation would add 0.9 percent to inflation. At times when prices of even the most basic commodities for existence are at record high, this price hike has come as an unbearable burden to the middle class. Due to higher transportation costs, food price inflation has reached 12.83% and a cascade effect will cause increase in prices of other commodities as well. It is not hard to realise that practically everything being used by us in directly or related to diesel which accounts for 15% of the costs. With 40% Indian still below international poverty line, this untimely price hike will only lead to increasing ridge between the rich and the poor, given the upper strata of society will be meagrely affected by Rs 3.00 hike in its already very high expenditures.
Opposition has strongly opposed the fuel price hike calling the govt. claims as bogus that this decision was in taken keeping in account high pressures of International rates. It has recommended reducing the sales and custom taxes instead to make up for the PSUs losses, which were kept at 100% of the normal. It is highly unjust to make people pay for inefficiencies of PSUs, which can increase their profits in other petroleum products which are not controlled.
Moreover, it has been observed that the reduced government losses are hardly utilised in any development activity and the money is spent in the lavish budgets of ministers and high profile government officials.
Agriculture has recorded a negative growth and speculations are being made that fuel price hike might pose a danger to national food security. With increasingly erratic behaviour of rainfall and critical water situation, irrigation by using diesel pumps is all time saviour of Indian agriculture, which will be adversely effected by diesel’s increased prices.
An immediate effect noted out of price hike announcement is the inflation. The finance ministry's chief economic adviser estimated that the deregulation would add 0.9 percent to inflation. At times when prices of even the most basic commodities for existence are at record high, this price hike has come as an unbearable burden to the middle class. Due to higher transportation costs, food price inflation has reached 12.83% and a cascade effect will cause increase in prices of other commodities as well. It is not hard to realise that practically everything being used by us in directly or related to diesel which accounts for 15% of the costs. With 40% Indian still below international poverty line, this untimely price hike will only lead to increasing ridge between the rich and the poor, given the upper strata of society will be meagrely affected by Rs 3.00 hike in its already very high expenditures.
Opposition has strongly opposed the fuel price hike calling the govt. claims as bogus that this decision was in taken keeping in account high pressures of International rates. It has recommended reducing the sales and custom taxes instead to make up for the PSUs losses, which were kept at 100% of the normal. It is highly unjust to make people pay for inefficiencies of PSUs, which can increase their profits in other petroleum products which are not controlled.
Moreover, it has been observed that the reduced government losses are hardly utilised in any development activity and the money is spent in the lavish budgets of ministers and high profile government officials.
Agriculture has recorded a negative growth and speculations are being made that fuel price hike might pose a danger to national food security. With increasingly erratic behaviour of rainfall and critical water situation, irrigation by using diesel pumps is all time saviour of Indian agriculture, which will be adversely effected by diesel’s increased prices.
Justifications and measures:
To some relief, government has already declared to reintroduce the price control if the international crude oil prices climb above $100/barrel. Concerned over inflation, government has already moved RBI to take sensible steps in its monetary policies to control inflation. Government has justified that petrol being an item of final consumption, hardly causes inflation and has promised to take adequate steps to check the rising prices.
Government shall also fix a minimum support price for major crops so that price hike does not affect farmers. To buffer the undesired effects, government should also try not to decontrol the prices of diesel and kerosene until out domestic market gets stable and inflation is controlled. It is agreeably necessary to match Indian fuel prices to the international ones but such steps taken slowly will give enough time to public to get comprehensive with the changes.
It should also strive to place an effective targeting system in the machinery to save BPL households from drowning under the burden of inflation, and should take steps to ensure that benefits of reduced deficits and increased income does reach the poor. The decision is a very remarkable one to take India at par with its major counterparts in International markets, but it should not be allowed to reap on the life of BPL and middle class people, who are not concerned with what happens in world of dollar, euro and rupee but just with their daily bread.
Government can also direct state governments to be vigilant that the subsidies are utilised only by those for whom they are meant, and should fine and tax the adversaries heavily. Encouragement should be provided to private sectors enthusiastic of introducing alternative technology to Oil, like Tata, Honda by extending best help possible for setting up such R&D laboratories and manufacturing plants, so that India can become capable of sustaining the inevitable energy crunch waiting for us in future.
Conclusion:
Critics shall always criticise any change brought forward, as this is what they are supposed to do. But they fail to recognise the far-ended vision behind this step, which had to be taken sooner later. One must appreciate Government for its politically bold step. On the other hand, it is our duty to instead work harder and grab numerous opportunities being provided by government and try to pull ourselves from the bondage of poverty, instead of just depending on subsidies and poverty schemes of government. Change is the law of nature and we must adopt a positive approach to change with the situation if we really wish to come out of this seemingly everlasting tag of a ‘developing nation’.
Critics shall always criticise any change brought forward, as this is what they are supposed to do. But they fail to recognise the far-ended vision behind this step, which had to be taken sooner later. One must appreciate Government for its politically bold step. On the other hand, it is our duty to instead work harder and grab numerous opportunities being provided by government and try to pull ourselves from the bondage of poverty, instead of just depending on subsidies and poverty schemes of government. Change is the law of nature and we must adopt a positive approach to change with the situation if we really wish to come out of this seemingly everlasting tag of a ‘developing nation’.
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