Narendra Modi’s  Oil Pricing Policy – All you need to know

 

Crude Price

The crude oil prices plunged below 30 dollars a barrel last week, settling it so low for the first time in 12 years. On 26th May when Modi took oath the crude oil prices were 108.56 dollar a barrel and retail prices of petrol and diesel were priced at RS 80 and Rs 65.21 a litre in Mumbai. Now after over 70 % fall in crude prices, the retail prices have declined less than 30 % to RS 66.09 and 51.25. The reason for crude prices fall not translating into equivalent fall in retail prices has basically been the frequent rise in excise duties by Modi government. Clearly Modi government has consciously chosen not to pass on the benefits of reduced crude oil prices to consumers.

This has generated a lot of political ridicule by opponents and even some supporters who have dug out old populist statements of senior BJP leaders ridiculing Government of the day for making oil expensive. While their is merit to the charge of hypocrisy against BJP (who can forget the Bharat bands BJP used to enforce when Oil prices were hiked),there is a need to realise that Modi government’s oil pricing strategy is actually wise and brave in many ways. It is a strategy which kills many birds with a single arrow. Though it reduces consumers disposable income in a time when increased consumption is direly required, the strategic benefits are far more consequential as one will realise from the following discussion.

ECONOMICALLY WISE

India’s nominal growth is projected to grow slowest in a decade with only 7.4% nominal growth registered in the April-September 2015 quarter against the budget expectation of 11.5% for the year. Corporate sales too have stagnated. Since government tax growth is dependent on nominal growth, government is having a hard time sticking to its revenue projections. The only silver lining has been that it has garnered nearly 1 lakh crore in excess taxes by raising the taxes on oil. This additional revenue has then been channelled in investments in roads and highways giving a boost to stagnating demand and job creation. Also it has allowed India to avoid either slashing expenditure or reneging on its commitment to fiscal deficit target. This has made India shine out as a heaven of stability in a global environment marked by instability and turbulence. This fiscal certainty and stability is why India weathered the long dreaded federal rate hikes with relative ease when it finally came.

So were it not for the government’s brave decision of keeping with it the benefits of falling oil prices, India would have higher fiscal deficit, lower global confidence in it, lower public investment in infrastructure and perhaps some other new tax which would have been much more painful. In short, even to imagine an alternative is a nightmare, but if Modi government had been prisoner of past oil pricing policy the nation would have surely faced such a nightmare.

RARE CASE OF POLITICAL FORESIGHT

By not translating the low crude oil price into similarly low retail prices, the government is avoiding expectation of too low prices among the electorate. This is important, as when the oil prices recover, which will likely be near the end of this government’s term (when it will be worried about facing an election), the government will be able to avoid passing on a price shock by raising price modestly and could instead reduce the duties on oil, leading to lesser and more manageable rise for the electorate. Also since the electorate would not have become addicted to dirt cheap petroleum prices, it will find it less difficult to manage the modest rise. Thus BJP should swallow the insults hurled at it today and persist with this oil pricing policy, happy in the foresight that when it counts, i.e during election time, this policy will only help it.

ENVIRONMENTALLY SOUND

Oil consumption is one of the most prominent source of pollution and greenhouse gas emission. Today when pollution in Indian cities and climate change have become such pressing issues, any lowering of oil prices would have made the situation worse by incentivising more consumption of oil and shifting people away from public transport to private ones. This is why it is generally, environmentally a prudential decision to tax heavily carbon goods like oil.

If one sees more taxing of oil in light of consequently higher investment in infrastructure (reducing jams, increasing fuel efficiency, cutting time and distance between places) and an emphasis on solar energy, it makes for more responsible environmental policy.

PRICE STABILITY

The oil prices have been declining continuously, defying expectations of many observers. By keeping the retail oil price largely stable, Modi has ensured that the uncertainty and costs (“known in economics as MENU COST”) arising due to price instability is avoided.

COUNTERS DISINFLATION

Suppressed rural demand due to rural distress, downturn in global commodities prices, struggling global demand and excess capacity with producers are factors which are creating dis-inflationary pressures in Indian economy despite high food prices. Now, if oil prices for consumer were to also start sliding, the dis-inflationary tendencies can get strengthened as oil is an important input. In such a condition by holding the oil prices for consumers to a fixed level Modi is countering dis-inflationary pressure. And as disinflation is not conducive to economic growth or stability it is wise of our government to reduce its possibility.

In light of all the above discussed factors it becomes clear that Narendra Modi government’s unorthodox oil policy is a perfect example of the smart and bold steps for which Modi was voted to power. The political opponents of the government should rise to the occasion by not opposing anything and everything for the sake of opposition. Well-intentioned yet misguided policies like the oil price of previous government have long held back India, a new India can no longer keep doing the same thing which failed repeatedly.

For Modi to have so boldly chosen a new path on oil pricing is a laudable thing that puts national interest over his own political interest and deserves our wholehearted support. One just hopes Modi owns up to this strategy publicly and communicates it to the masses so that a new enlightened consensus on oil pricing can replace the mistaken one of the past.

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