Love Story 1750, 1950, 2000, 2050 …

This marriage was arranged. But unlike others, this was not made in heaven – hell it was. Yet, despite their continuous separation, the divorce never happened. They always got back together. Such was their love. This is the story of Politics and Economics, the most popular characters of our day. Their love story is one that cuts across the barriers of country and time.

Today, after a period of separation, Politics and Economics are together again! The UPA government finally has bitten the bullet and increased the prices of diesel and petroleum – a measure it should have taken a long time ago. But due to the event of the upcoming general elections, Politics and Economics had to face their unfortunate separation. The Congress may almost definitely loose the election, but the Economist Prime Minister has acted, and acted to solve a problem. So, how has this oil price rise been beneficial? Did the government have any alternative courses of action?

Even though the government talks about the current inflation scenario being ‘imported’, the truth is that developing countries like ours have also contributed to the mess. Now, inflation happens due to two factors – a rise in demand, or/and a fall in supply. This time around, both causes hold good. While there have been supply-side shocks, there has also been a rapid rise in demand, especially from the emerging economies, which account for 90 per cent of the increased oil consumption in the world since 2002.

If we talk about India, we can identify many fiscal and monetary policies that may have contributed to this increased demand. Let us take an objective and simplistic look at the latest Government Budget – taxes have been reduced across all income categories and prices of small cars have witnessed a fall. While the first increases the disposable income in the hands of the public, the second necessarily contributes to an increased demand for petrol and diesel.

The government would also need to re-look at its monetary policies. It is a fact that these policies lie under the purview of the central bank, but in India there is a large amount of inter-dependence between the Reserve Bank of India and the government. Our monetary policy has loosened the money supply in the economy by continuously decreasing lending rates, the cash reserve ratio and so on.

Until now, the government had been bridging the gap between the actual price and the market price by means of subsidies and oil bonds. Consequently, the subsidies account for as much as 2 to 3 per cent of the GDP. These subsidies are detrimental in more ways than one – firstly, when governments in countries like India prevent prices from rising, they further the rise of oil prices in the world. The concept of subsidies backfires as the consumers do not reduce consumption, and as long as the supply-side shock remains, the inflation is aggravated. Secondly, subsidies being a non-developmental expenditure add to the government’s fiscal deficit, placing it in a viscous trap of debt. India’s domestic oil firms are bleeding with huge losses, and are inadequately compensated by ‘Oil Bonds’, which is simply a nicer thing to call subsidies. Morgan Stanley estimates the government’s deficit for the current fiscal to be at a 9-10 per cent of the GDP!

So, now that the decision has been taken by the ruling coalition, it has been very easy for the Opposition and the Left Front to oppose the act. While the Left has decided to recourse to its favourite form of protest – strikes and bandhs, the BJP has termed this move of the government as ‘Economic Terrorism’! But would either of them have acted in a different way?

However, there are other ways out. Unfortunately, both the alternatives face a problem in implementation. The first is to develop alternative sources of energy, which makes the Nuclear Deal even more crucial at this juncture. But both the Left and the BJP are vehemently opposed to that too (at times I wonder if the role of the Opposition is to merely oppose or also to help resolve issues for the sake of the country!).
Another important measure that must be taken is to strengthen the public transport system. Transport woes are not resolved by producing a car as cheap as the Nano (whose release will make the oil crisis much worse), but by making qualitative Mass Rapid Transport available to the public. However, this is not viable in the short term, as the infrastructure cannot be created overnight, and is contingent upon the funds available.

Thus, the only economically viable option was to increase fuel prices and allow Politics and Economics to get back to each other. Despite divorce rates rising, here’s one marriage that will never break. That is Love Story 1750, 1850, 2000, 2050…..

Rohan Sandhu

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