The sacred cow- Oil subsidies

Usually the front page news of Times of India is always about Indian film industry or cricket or some wardrobe malfunction of an actress. But since yesterday fuel price increase has captured most of the headlines. I realized that this is going to be the hot topic on Facebook as well. Friends and families in India started blaming the government and its corrupt policies. Although, I do agree with people’s outrage, economist in me told me that this is the right macro-economic step for a nation that is buried under subsidies.

 One of the tragedies of democratic politics is that when the politicians try to do the right thing that makes sense in macro-economic terms that decision might not always flow through the general public as a logical one.  Thanks to their shady past and prior corrupt and not-so-smart public policies. We are all aware of their strong “what’s in it for me” mentality. Hence, the current decision by the UPA government to increase the prices of petrol in India by 10% (Rs7.50) might come out as another blunder by the corrupt government.

Economically speaking, given the fiscal deficit that India is facing (and growing by the day) there needed to be some action taken on the amount of subsidies government is spending on the fuel. India imports 73% of its fuel needs, in other words out of 3.3 million barrel of daily consumption, India imports 2.2 million. In 2011 India imported $95B worth of petroleum products and exported $30B, a net deficit of $65B. India is facing a subsidy bill of $40B (Rs174,000 crore) for 2011. That’s almost 2% of India’s GDP, in subsidies alone. So, it does make sense for the government to bring the oil prices in level with the global crude oil prices. After all we do live in the globalized world.

But can we really think in pure vanilla-economic terms when we are talking about public policy in India? No...if we were thinking economically, so to speak, why not then reduce the defense spending which is touching 5% of the GDP and diverts some cash to this sector. Heck, bring corruption in control and India will save around 10% of its GDP, conservatively speaking. I know that’s not going to happen, so let’s think some logical steps, why not privatize the oil sector? It’s not like government babus are doing any good running the companies, plus look at the successes of the telecom sector and the airline sector (lately it’s been facing some issues, but it’s only because of their debt exposure).

I do believe that India needs to get rid of its subsidy burden (plus, subsidies breeds corruption), but not at the expense of the aam admi. Government should focus on other areas to save money and focus on the subsidies when global crude oil prices are lower.