Fuel price hike: Reintroduction of petrol, diesel subsidies will rob us of future gains

The fuel price hike has already been much debated upon, but an economic rationalisation of the same has been missing. Here, we would like to present sound reasons why government should not bow down to the demands for subsidising petroleum and petroleum products prices.

Firstly, environmentally petroleum is one of the major pollutants. Keeping its prices high will push people towards other alternatives. This is also the case with the most developed economies in Europe. The pricing of petrol and petroleum products is kept high to encourage use of non-conventional energy sources.

In transport sector, this move, pushes people towards LNG and electricity-based vehicles, or public transport. However, the absence of good public transport in India is something which needs to be improved upon, if the government wishes to take this policy forward.

Further, the transport sector can be divided into commercial and private vehicle owners. Car is still a middle class vehicle. It is the same class which is most vocal about environmental issues also. Both the standpoints of the middle class are hence, self-contradictory.

It is time that citizens realize that a good environmental quality is not free of cost, and it will require efforts on part of everyone, in ensuring the same. One cannot complain of rising pollution and its effects like the smog in Delhi and rising petroleum prices in the same breath.

Representational image. Reuters

Secondly, in so far transport sector is concerned, it is wise economics, considering that fuel efficiency in transportation sector will increase as GST regime proceeds further.

One of the stated benefits of GST is that it will decrease fuel consumption per kilometer by reducing the halts made by an average transport vehicle. Previously, such a vehicle would need to make multiple stops on all state border to pay respective taxes in different states. Due to GST regime coming in force, such tax is paid in the form of GST beforehand and only once, so there are no subsequent stoppages related to collection of taxes. This naturally reduces the fuel consumption for the same amount of travel by increasing the efficiency.

This benefit of efficiency entirely goes to the transporter and will set off any subsequent price hike by the government. The activation of GST regime has itself negated the logic to subsidise the fuel by reducing center and state taxes.

Thirdly, in domestic (which majorly depends upon Kerosene oil) and agriculture sectors, higher petroleum prices are again an incentive to switch to electricity and LPG based operations. As far as availability of alternative energy sources is concerned, one cannot forget that UJJAWALA scheme of the Union Government has been a very successful policy, especially because the capital investment required has been met by the government.

It has to be taken into consideration that government subsidised the use of LPG via UJJWALA and then hiked the petroleum prices. This made the economic choice of using a cleaner fuel, easy. The gas burners and cylinders were initially given on loans under UJJWALA scheme by the government and recently, the government announced that repatriation of such loans will not begin until the first six refills of cylinders, are complete. This further made sure that the people stick to the choice of a cleaner fuel.

However, the challenge before the government in this regard remains, where it must ensure smooth supply of LPG in rural areas, where it is uncertain due to rampant black marketing. Similarly, government must take a proactive approach to increase number of LNG filling centers in the chosen smart cities.

In conclusion, high petroleum prices in the current context, is an example of good economics, as far as tradeoff between environmental quality and economic activities is concerned.

It has a very sound distributive aspect when seen in the context of other economic policy actions initiated by the government. It is good politics too, when we consider that poorer sections of the society have already been provided with alternatives e.g. LPG and electricity.

(Pandey and Singh are Research Fellows in Economics with the Department of Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai)