[sustran] Re: Fuel prices and inflation

[Pardo]

Please see the section on fuel prices of www.sutp.org . One of the most recent publications there discusses that point. There is also the fuel price survey which has prices from 100+ countries which shows a better reality on how cheap or expensive fuel is. The middle class argument is not well founded, deeper research shows that higher fuel prices are better even for low-income groups. 

If Lee Schipper were with us, he would have given us such a thorough answer...

Pardo

Typed on keyboard projected onto a glass surface. Please excuse typos. 

On 24/09/2011, at 4:43, Aashish Gupta <aashu.gupta20 at gmail.com> wrote:

> 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
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>> SUSTRAN-DISCUSS is a forum devoted to discussion of people-centred,
>> equitable and sustainable transport with a focus on developing countries
>> (the 'Global South').
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> SUSTRAN-DISCUSS is a forum devoted to discussion of people-centred, equitable and sustainable transport with a focus on developing countries (the 'Global South').