Read the papers and you get a sense that Indians pay one of the highest taxes on fuel. And, when the petrol prices are raised, there is much hue and cry. The general line of arguments being:
1. The government should reduce taxes on fuel.
2. The government should not increase petrol prices as it will hurt the poor.
3. Rise in petrol prices will lead to inflation.
The first argument, perhaps, has some rationale. The government could, in theory, reduce the multitude of taxes imposed on fuel. However, in that event, the government could stand to lose out on revenue. One could argue that the typical Laffer curve effect could make up for the lost revenue. Whether, this will work or not is a moot point. For sake for argument, let us assume that the Laffer curve argument does work. This implies that demand for fuel would have to increase commensurately. Now, India imports most of its oil, therefore larger demand will, ceteris paribus, increase the trade deficit. Meaning we will have to pay to the world more than what the world owes us, which is not a very happy situation to be in. Therefore, reduction in taxes, though possible, may not be practical. On a related point, even some of the developed nations pay more than than India (refer to the chart above)(Source: T Magazine with the Financial Times and some calculations). Let there be calm.
The second argument is a classic one. Here is a question - When was the last time you saw a "poor" person owing a motorized vehicle that ran on petrol? Perhaps never. Yes, the middle class will be affected. The rationale for the government subsidizing petrol consumption is not well grounded. After all, loss to the exchequer is often made up by increasing taxes somewhere or the other. Therefore, subsidy on petrol will be made up by higher taxes else where.
Coming to the third argument, petrol is primarily used as a fuel for private vehicles. This argument would imply that inflation will be cost push i.e.being caused by higher input prices. However, petrol is not an input in the production process. Bulk of the transportation of finished goods happens on vehicles which run on diesel. Therefore, the increase in petrol prices causing inflation is far fetched.
On the flip side, de-controlled petrol prices have a number of benefits:
1. Prices rise but also fall depending upon the price of imported crude oil.
2. Since, the subsidy burden of the government reduces, government finances are better. This is a good thing. Think Greece, think Portugal, think Spain and Italy.
3. Paying market prices on petrol reflects the true demand for petrol thereby, perhaps, reducing demand (when prices increase) and lowering the trade deficit.
Now how about de-regulating diesel or LPG or both. Anyone?
P.S: These are obviously my views. But you already knew that, didn't you?
