[sustran] Re: Fuel prices and inflation

Aashish Gupta aashu.gupta20 at gmail.com
Sat Sep 24 18:43:09 JST 2011


Dear all

Hello. I have been thinking about this for sometime, and thought I should
intervene. I do have a few questions, though. What is the evidence on the
price elasticity of demand for petrol and diesel consumption in private
vehicles? I think this is an extremely important question. Of course Ashok
(and I too, along with many others) thinks that raising diesel prices will
lower demand for private travel, even shift middle class households (or
others, who might be using two wheelers) to public transport, and while this
is an extremely plausible hypothesis, I do want to see the results on this.
One could imagine several counters-points to this, for instance by arguing
that actually, travel demand is inelastic to small price changes, since
these dont affect the middle class that much; even if they do, they cant
help it much because they have already brought a car or a motorcycle and
making changes would require other lifestyle changes, that they are
"locked-in" to using a car or a motorcycle, etc. Any pointers? If there
arent enough good studies of this, then this is an excellent topic for
research, since fuel price hikes are common in india. :)

The other thing, of course, is the impact o inflation on food and other
prices (of fuel price hikes). I have tried looking around that in the past, but
there are several senses of the data. In the past, various economists
associated with the government of India have claimed (at different points of
time) between .4%<http://www.steelguru.com/indian_news/Macroeconomic_indicators_-_Fuel_price_hike_impact_June_inflation/223614.html>and
1%<http://www.deccanherald.com/content/77451/fuel-price-hike-impact-inflation.html>(or
this<http://www.business-standard.com/india/news/fuel-price-rise-inflation-to-go-upeffects-uncertain/399478/>)
percentage points in the inflation rate because of such hikes. Of course, I
dont think we should believe the economist's words on these, especially
because some of them have made really bad statements in the past about
inflation.

I think members of this community would be extremely interested in this
report <http://petroleum.nic.in/reportprice.pdf>, specially table P1
(section 4.2). Just for background, this report provided the basis for the
change in the policy to allow for "freeing of prices". I also quote from the
report,

Even assuming that the truckers, power generators, industrial users
etc.(other than the passenger car owners) are able to pass on fully the
additional cost of diesel, an increase of Rs. 4
per litre would mean an increase of around Rs. 20,000 crore in their cost of
diesel which would be around 0.4 % of GDP in 2008-09. This should be
compared with the inflationary impact of subsidies, which would be similar.

Overall, of course, this isn't enough evidence on the impact of inflation,
and if someone can do this analysis or point out independent evidence of the
same, that would be just great. I wish I had the econometric prowess to do
it, but I am just learning, and cant. On the other hand, I do know that its
not a very difficult analysis. One just has to regress past inflation rates
on changes in petrol prices and some other variables, to find out the
impact. Again, excellent research topic.

Having said inconclusive things about the most important things in this
debate, I would like to come to other things mentioned. Karthik, bang on
target that targetting has failed (horrendously) in India. For instance,
around 2005, several studies (IHDS, NFHS, NSS) point out that half the
people in the bottom quintile did not have BPL (below poverty line) cards.

Ashok, that food should not be unduly cheap and that higher prices benefit
farmers is a very important debate, again, globally. For instance, one finds
echoes in this debate on food prices between
oxfam<http://www.oxfamblogs.org/fp2p/?p=4054>and
others<http://www.adamsmith.org/blog/international/oxfam-is-wrong-about-food-prices/>.
It is also true that if prices of food or agricultural commodities rise
because of increase in prices of diesel, farmers dont benefit. You are right
on prices reflecting true costs, which would include the cost of
environmental externalities for diesel or petrol. However, it is because of
this notion of true cost that i support subsidies in modern cooking fuels
for the poor - remember, that there are positive externalities for women in
households from smokeless chulhas, lpg, methane or kerosene. Karthik, the
use of bio-fuels, however, is another blind-spot, mainly because until very
recently it was thought that the use of these (things such as wood or
cow-dung) by the poor is carbon nuetral - the poor are only using carbon
sequestered recently, and this carbon can be again sequestered by growth in
vegetation. Of course, to check whether this is true, one has to compare the
rate of consumption with the rate of regeneration. I do agree about your
analysis of cooking subsidies.

Before I leave, I would also like to mention that diesel has become an
important input for farmers as well, especially in areas which dont have
reliable or any power supply. As is clear, farmers use diesel pumps for
irrigation. Of course, whether thats enough justification for fuel
subsidies, is another point.

What I personally find abominable is the response of the left-parties in
India (but also of others, including the main opposition) on fuel prices -
things such as food prices are much more relevant to the poor, and the
solutions for them (such as an expanded PDS) are much nearer in sight than
this petrol price debate. What is also harrowing is that the environmental
side of the debate is completely absent: India that way desperately needs a
party with a 'green' vision. The reason for this anger by mainstream
opposition parties on fuel price hike appears clear to me, that is their
very middle class bases and leadership - the organised labour movement for
the left (public sector bank or railways employees, eg.) and high caste
middle class people in the case of the BJP.

Warmly
Aashish

On 24 September 2011 09:52, Karthik Rao-Cavale <krc12353 at gmail.com> wrote:

> 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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> > equitable and sustainable transport with a focus on developing countries
> > (the 'Global South').
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