No to Subsidies, Yes to Infrastructure
As the inflation in India rises to 8.75%, it is time for the economists and the policy makers in India to rise above petty politics and ponder over a long term solution for both the oil crisis and the capacity of the economy to digest the amount of money that is pouring in the country.
For many years now, India has been subsidizing the consumption of oil products in the country. As a result, the efficiency with which the average Indian uses these sources has taken a hit. There was a time when I saw my parents and uncles complain that the prices of petrol have hit Rs. 20/litre. Now it is close to Rs. 60. While prices have risen considerably, the government has, time and again, resisted passing on the full burden of the global price rise to the Indian consumer. Some of this resistance has been because of the regressive politics of the Left parties but much of it has been the lust to remain in power.
The oil producing countries, chiefly the OPEC, have taken advantage of this situation. While crude oil is a limited resource and will be expended completely in some time, I believe we still have sufficient oil reserves globally to last a century – if we also start promoting and using renewable sources of energy. This is to say, that the current crude oil prices which stand at $ 139 does not seem justifiable. There is more to it than meets the eye.
By subsidizing the Indian consumer, the government has not forced us to use petrol, diesel and LPG judiciously. Wastage may have dropped as a result of the rising prices but efficiency is far from being attained. As a result of the subsidies, the demand for the oil products is artificially maintained, leading to a situation where the OPEC is benefitting directly by raising prices. If the full impact of the rising global prices of crude is to be borne by the consumer, three things will be achieved:
Consumer will use oil products judiciously. This may lead to car pools and more use of the public transport. This will help contain the global warming problem.
Reduced demand may help reduce our oil import bill. This will significantly benefit the economic health of companies like Indian Oil Corp. which suffer tremendously when forced to sell petro products at a price lower than what prevails in the global market.
A developing country like India with massive energy will be forced to take to clean energy sources like nuclear power and alternative energy sources. This has long term benefits for the ecosystem; not to forget that the future generation will have to use renewable energy extensively.
If we leave aside the problem of rising crude oil prices, the other factor that we need to address is how to keep inflation under 5%, even when the economy is growing at close to double digits. This overheating of the economy when foreign investments get pumped into India shows that the economy is not equipped to handle so much money. In other words, the supply response from the economy is not fast enough and bottlenecks in infrastructure and in the expansion of productive capacity limit the economic growth.
Instead of looking to curb inflation by raising interest rates, the government needs to look at the supply side. China has been able to grow at around 11-12% while keeping the inflation at 3-4%. This has happened because the Chinese have built roads, bridges, and dams long before there is an actual need for them. Contrast this with India, where infrastructure projects almost always exceed their time frame (e.g. Bandra-Worli sea link in Mumbai) and where the state governments keep dilly-dallying on SEZs and manufacturing plants.
Accelerating the nation’s production capabilities will help the economy cruise along at a higher speed with lower inflation. It is important that infrastructure bottlenecks are not allowed to become a constraint on the Indian economy. In addition, it is important that we address the agricultural issues by not only increasing productivity but also by limiting the wastage while storage, which currently at 10%, is extremely high.
Clearly, action on agricultural and infrastructure front will help solve the nation’s problems. Subsidies by delaying the much-needed action at grass-root levels will only compound issues in the long run.
