“Central government hikes fuel prices” - It’s impact in Indian economy

After much deliberation, the Central Government on Friday, the 25th June 2010 announced fuel price hike across the board that petrol price by Rs. 3.50 per litre, diesel price by Rs. 2 per litre, kerosene by Rs. 3 per litre and LPG which is used for cooking is raised by Rs. 35 per cylinder. This will help the government to minimise its deficit and could help to generate funds for economic growth but will also push inflation up. The Empowered Group of Ministers (E-GoM), headed by Mr. Pranab Mukherjee the Union Finance Minister, cleared the hike of fuel price, which is based on the recommendations of the Centre-appointed expert group, headed by Dr. Kirit Parikh. Defending the increase, Union Minister of Petroleum and Natural Gas Murli Deora said: “The government has decided to deregulate fuel prices … however, the government will intervene in case of high volatility in the international crude prices…we are there to safeguard the interest of consumers.” Day by day the international barrel prices are shooting up. In such a situation how long do the people expect to enjoy subsidies from the government?

The Indian oil companies reported Rs. 77,000 crores as subsidy on crude oil out of which the load of 33,500 crores of rupees were shared by the govt. in the form of oil bonds and the rest of amount Rs. 43,500 crores was observedas as a loss of PSU oil companies in the balance sheet. If the oil companies being owned by private sectors, either that would have closed down or people would have been purchasing the oil at cost more than three times the present level. Practically we have seen when Reliance could not able to compete with other PSU petroleum companies, they closed several retail outlets. But question is how long the government is going to bear the burden of subsidy and these petroleum companies (PSU) will be able to survive with such huge losses?

Indian Government is spending a huge amount on providing subsidy. And this expenditure is a major portion of the revenue generated through various taxes. This is also another side of the issue that government was taking the burden of subsidy due to politics and for votes and this step was long overdue. It should have been years ago.
During the worst recession period, the crude oil prices were around $150/barrel, at that time the price in India hiked from Rs.45 to Rs.55 for one litre of petrol. But now crude oil price is near $76, but now petrol costs even higher than the recession time, Why?

In a country like India where government failed miserably to develop an efficient public transportation system, lot many people are depended upon personal vehicles to cover unavoidable distances. These are the people to whom even three rupees hike matters much. One can not deny that government can not sustain the huge subsidies for a long time. But at the same time we should thought about that section of society which genuinely need government protection from predatory market driven price mechanism. Financial condition of all the citizens are not equal, so it is injustice to apply such policy equally. The Government could have taken another step by increasing the taxes on vehicles (private cars) as per the various class of vehicles without reducing the subsidies on fuel. This would have no doubt served the purpose without burning the pockets of common man. Hike in fuel prices is affected all lower classes of people because there income is very low. The fuel price hike has got cascading effects like increase in transportation cost causes increase in cost of production and public expenditure due to hike in fare of transportation. Thus it is obvious that the increase in the price of food items and other necessary goods are also going to increase which definitely going to have an impact on hike in inflation may be by 1%. Our country is importing petroleum at high cost and the burden of this is borne by the general public either in the form of taxes or of general hike in the prices of all commodities. Higher crude prices will definitely weaken Indian economy. The manufacturers are disappointed as they have no other choice to increase the selling price of their products due to increase in production cost . Due to this the increase in price the total market demand is definitely going to reduce to all commodities results less business and will definitely weaken Indian economy.
 

Questions:
 

1. What is the role of government for this policy?
2. What do you understand about the fiscal policy?
3. Is the decision taken by the government is right on your view?
4. Is it going to have any effect on inflation?
5. In short run and long run what will be the effect of this decision on Indian Economy?