Why the petrol price hike is good for all of us

With crude oil prices scraping the bottom of stratosphere, the Manmohan Singh government has finally increased petrol prices by Rs 5 a litre and diesel by Rs 3, and a cylinder of cooking gas by Rs 50, so that the oil companies do not go under.

Bhamy V. Shenoy, who has for long been asking why discussing oil prices or corruption in oil sector is not as glamorous a subject as IT and BT, argued in Deccan Herald last week this was the correct course to take even at the risk of inflation and a political backlash.

Petroleum product prices, he says, have been frozen at the level of $70 a barrel while international oil prices have climbed to $135 per barrel.

“Actually by not allowing the oil price increase to flow through to the final consumers of petrol, diesel and LPG, the government is helping mostly those who could easily afford. The revenues which government has lost by this misguided policy could have been used to support the poor by subsidising the galloping price of food items and for many other welfare projects.

“At crude oil price of $120 per barrel, the government will lose as much as Rs 193,000 crore per year. I have intentionally used a lower oil price to reflect the possibility of prices coming down. Kerosene and LPG subsidies account for Rs 55,000 crores which is almost equal to the loan write off to farmers in this year’s budget.

“Unfortunately while PDS kerosene is diverted to blend with petrol and diesel, LPG subsidies help mostly those who could afford to pay higher prices. In addition, residential LPG is diverted to commercial and auto sector where prices are considerably higher. This results in black money generation to the tune of Rs 13,450 crores.

“It is true that if diesel prices were allowed to increase with international oil prices, it would have increased prices in general. But the impact of such a price increase on economy is considerably lower than the loss of Rs 1,10,000 crore to the government.

“In the short term consumers may welcome such a price relief. We should not forget that there is never a free lunch. Some one has to pay for higher import cost of oil directly or indirectly. In the medium term because of increased deficit financing it will affect every one. But as is well known, the poor will lose more than the rich and the middle class. Thus the very class that the government claims to help will end up losing the most.”

Read the full article: No free lunch