[sustran] Re: Fuel prices and inflation

[Karthik Rao-Cavale]

Rutul,

This is an excellent question to ponder about, and I am not sure about the
empirical answer either. We do know that the cost of production of most food
items (grain, fruit, vegetables) in India is only a fraction of the sale
price. We cannot rule out the possibility that the cost of transportation as
a fraction of the total sale price is large enough to have a noticeable
impact. But there is also the fact that many of the protests at the time of
a fuel hike are organized by the trucking companies and also the communist
parties in India (I vivdly remember the all-India protests by the Communist
Party in July 2008, when my trip to the north-east was punctuated by
consecutive strikes in Orissa and Assam) Whose economic interests do these
protesters represent?

That said, I feel that the simple counter-argument to the middle-class
argument is to say that if we want food prices to be maintained at low
levels, then the straight-forward answer is to have larger food subsidies.
The mood in the neo-liberal camp is increasingly in favour of targeting
subsidies - here would be an excellent place to start! Why subsidize the
owner of a diesel-guzzling SUV if all we want is to keep prices of food low?
Why not increase subsidies to the PDS (Public Distribution System) instead?

There is now enough consensus to push for universal PDS and to get rid of
the discredited system of targeted food subsidies only for people who have
been identified as below poverty line (essentially, it is impossible to
identify people according to economic status, which results a great deal of
exclusion). I once did some back-of-the-envelope calculations and found that
savings from removing fuel subsidies could cover as much of 2/3rds of the
additional cost of converting the targeted PDS to a universal PDS system.

There is also another angle to this. The cost of transportation does not
depend on the cost of fuel alone. It also depends on the quality of the
infrastructure. What we now have is a transportation infrastructure that is
over-used in cities (and therefore of bad quality) and non-existent in the
hinterland. Fuel subsidies exacerbate the over-use of infrastructure, and my
suspicion is that the net effect on transportation costs in some places
might very well be to increase it. Another alternative to fuel subsidies
would be to focus on improving transportation infrastructure, especially in
the rural hinterland (which includes both rail and road).

One important qualifiers: my analysis does not extend to cooking fuel.
Subsidizing cooking fuel does have the effect of creating a black market for
adulterated fuels. But given the affordability gap, taking away cooking
kerosene subsidies will result in a sudden shift towards burning wood,
charcoal and dung-cakes, all of which are extremely harmful to female health
and also potential causes of global warming. That is not something I will
ever recommend.

karthik

On Fri, Sep 23, 2011 at 10:36 PM, Rutul Joshi <joshirutul at yahoo.co.in>wrote:

> Hi all,
>
>
> I have a query - probably a naive one.
>
>
> Every time there is a fuel price hike in India, the complete hoax
> starts doing rounds on the social-networking site about 'how fuel is
> cheaper in other countries in Asia?' and 'how this rise in fuel prices
> is going to affect the economic growth'. The argument put forward by the
> middle-class and their friendly media is the links between the fuel
> cost and inflation leading to price-rise in the food items and the
> shrinking of the food basket of the poor people. Some other people (in
> ultra-minority) argue that it is just middle-class propaganda to shield
> themselves in the name of the poor. However, I don't know how valid or
> in-valid these arguments are. Intuitively, I am with the second group
> but I don't really have stronger basis for it. Can some of you who know
> these issues in detail, throw light on the same?
>
> Thanks,
> Rutul
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