Adding to fuel to inflation

Harold Wilson, the former Prime Minister of UK, had once said, “One man’s wage rise is another man’s price increase.” If we were to alter that quote a bit for today’s context we could perhaps say, ‘one commodity’s price rise is multiple price increase of almost everything.’ And the price rise has been so steep that wages can never be on par with it.

Take, for example, the steep hike in the oil prices. On May 14 the price of petrol was hiked by as much as Rs 5 per litre. On June 25, the diesel prices went up by Rs 3, kerosene by Rs 2 and LPG by Rs 50. Since the time the government deregulated the petrol price in June 2010, the petrol price has increased eight times to almost 12 rupees. If one takes a glance at the last two decades, the price of just petrol has gone up by an incredible 60 rupees. It was around Rs 8 in 1989. Today the cost of petrol is hovering around Rs 67-68 per litre.

What is more hurting is the fact that the government increased the prices of diesel and LPG even as the inflation went up to 9.13 per cent and the Finance Minister, Pranab Mukherjee, dubbed such high inflation as ‘unacceptable’. And now, the prices in general and food prices in particular will rise further in the coming days as there is a cascading effect with the fuel price rise. Already, the state transport department of Karnataka has increased its ticket fare by over 6 per cent.

The prices of petroleum products in India are prohibitively high because of the huge taxes levied on them. In fact, the taxes on oil in India are one of the highest among most countries. Consider this: for every litre of petrol that we buy, more than 50 per cent goes as taxes of seven different kinds. The governments, both in the centre and the state, are reluctant to roll back the taxes for various reasons. The governments know that fuel is fundamental and directly connected to day to day living. Many things from transport to agriculture to industries depend on petroleum products. So the governments know that the surest way to fill the state coffers is to hike fuel prices constantly.

Even as the crude oil prices in the global markets go up, it is still possible to manage the local prices by reducing the excise and customs duties and rationalising several other taxes levied on petroleum products. But we hardly see this happening. This time the government reduced the customs duty which was levied last year on crude oil by 5 per cent. This is just an eyewash as the government has not really reduced any original customs duty. For the record, after the government deregulated the petrol prices last year, the oil companies have increased the prices on a monthly basis. The steep hike of about 12 rupees for petrol in the last one year after the government deregulated the fuel price has never happened when the government controlled the prices. However, it is interesting to note that from January to May 2011 the oil companies did not increase the price as per the government directive owing to Assembly elections in several states. It is indeed ironical that the same oil companies that crib all the time about their losses were able to manage when there were elections in the country. It is unfortunate that the government that promises moon to the voters during elections holds them to ransom after the elections.

Global price rise

Why are the global crude oil price rising so much? The main cause is the imbalance between demand and supply. Greater demand for crude oil is seen in rising economies like China and India. In fact, China overtook Japan as the world’s second largest consumer of oil in 2003 itself and is sure to become number one consumer ahead of USA in the coming days.

Analysts believe that the demand for oil will rise from about 90 million barrels a day to more than 140 million barrels in the next 25 years. In such a scenario we will only see further rise in oil prices in the coming days.

The challenge before India is to encourage renewable energy such as solar and wind on a massive scale. This can serve two purposes. One, it will bring down the demand for crude oil considerably. Second, it will reduce the carbon emissions, thus conserving the environment. Perhaps, we must take cue from many Western countries such as Germany and Denmark that have invested quite a lot on such renewable sources of energy and reaping fruits. The steep price rise of oil that we have seen recently is an indicator for us to wake up before it is too late and consider turning our attention seriously towards alternate sources of energy.