So the petrol prices have been pumped up the Government of India again, by rs.7.54 per litre, the single largest hike in Indian history, making the current price of petrol rs.81 in the City of Bangalore (the highest in the country) and anywhere between rs.73 and 80 in the rest of the country. And as was to be expected, the people railed and cried, the opposition parties launched dharnas and protests, online petitions are being circulated on change.org to reduce the petrol prices and everyone is lamenting about how this will further push up inflation, especially of food products. There is however an argument to be made for increasing petrol prices, a very compelling argument, which will be made here.
First of all, the state owned oil distribution companies are making annual losses of Rs.8000 Crores, with them being forced to buy oil at market price and sell it in India below the market price. This has two effects, one is that obviously the oil corporations are running at a loss (they are actually close to bankruptcy right now) and the second is that India’s foreign exchange reserves get hit, badly. This is further augmented by a constantly falling rupee, which hit an all time low of 56 against the dollar today. And as the dollar is the primary international trading currency, buying oil has become extremely expensive for the government. Thus, to ensure the survival of our state owned oil corporations and to make sure that India’s forex reserves do not get hit very badly, it is necessary to increase the price of petrol atleast if not LPG, Kerosene and Diesel. And we must remember that, we are still not paying the market price of oil, which would be far more expensive.
Secondly, the argument for inflation does not hold. This is because the entire argument of increasing petrol prices=increasing inflation is based on the premise that the transportation of goods, especially food products, will get more expensive. This is a factually flawed argument, as the majority of goods are transported by trucks and trains which use diesel not petrol and diesel hasn’t gotten any more expensive. Petrol is used almost exclusively by consumers who own individual cars and not for purposes of mass transportation or electricity generation. And the consumers who own cars should be made to pay the true cost of driving that car, and not be subsidized for it.
This brings us to our third point, an increase in petrol prices may hurt us in the short run, but logically should increase our long term savings substantially. This is because of the following logical chain- an increase in petrol prices means that consumers who want to buy cars will buy more fuel efficient cars to increase their personal savings, which in turn means automobile companies which want to compete in the car market will need to make their cars more fuel efficient and will attempt to do so to get more consumers, this further means that in the long run, we will consuming far less petrol per capita, which in turn would reduce our oil imports and our gigantic oil bills and reduce our deficit in the balance of trade. It can also be seen that lesser oil consumption, would mean lower greenhouse gas emissions and consequently a lower carbon footprint. This chain is not a hypothetical study but has precedence in the USA of the 1970s, when in response to the oil shock and reduced oil supply, the US government instead of subsidizing the oil prices, increased them, which also directly led to the growth of the Japanese car makers (which are more fuel efficient than their American counterparts) in the USA, which in turn forced the American car companies to increase their fuel efficiency.
It must also be remembered that the petrol price hike affects almost exclusively the urban middle and upper middle classes and not the masses or the villagers and it would be hypocritical and shameful if we force to government to revise the prices to save a few hundred rupees in our pockets, which effectively means that we are asking the government to subsidize the cost of our driving our Honda Citys, while costing the nation thousands of crores. This price hike is not only due, but welcome and there is undoubtedly another price hike around the corner.