Highly Inflammable Inflation

At times, it will be necessary for governments to take hugely unpopular decisions for the greater good and long term positive results. Only a decisive government can take such decisions and we need governments who can make such calls. The price of petrol was deregulated and Oil Marketing Companies (OMC) were given freedom to decide on prices on June 2010 and it has been the cause of public outrage ever since, but it was a step in the right direction. The last bout of revision meant prices went up by over Rs.7. This price hike is definitely justified in the light of fall in the value of rupee, high international prices the world over due to tension over Iranian issue and huge current account deficits. The need for sound financial management is beyond questioning, we have already experienced what such crunches can do since it was such a crisis in 1991 that pushed our nation's financial stability to the brink forcing us to adopt revolutionary economic reforms.

There are a few other reasons to justify higher price for petrol- world over, consumption is rising at such a rapid rate that we will see end of oil within the century, burning of fossil fuels also add to global warming and higher pollution levels and we also see lop-sided power and influence for a few countries that own oil wealth and for those that have influence over these oil producing countries. By keeping the price of oil high, it is assumed that consumption is discouraged but this is rarely true in the case of petroleum products since this is what moves the country, its people and its economy and so no matter how high the price, we will pay for it and there are no viable alternatives either.

In spite of the fact that price rises are justified for petrol (and also for other petroleum products, the prices for which are still under government control), the government must do its part to protect citizens from such hardships. The price of petrol that consumers pay consists of not just the cost of production and margins of OMCs as almost of 50% of it goes to the government (both central and state) in the form various taxes and duties. In the short-term, government can reduce taxes it levies on the consumer by not just forgoing additional revenue from the hiked prices, but a cut in the tax rates themselves. Revenue forgone by reducing and not levying taxes and duties on gold and diamond for the years 2010-2012 was more than 1 lakh crores and during 2012-2013, the government withdrew its own budget proposals to levy a nominal 2% tax on these items which shows that cutting taxes is not something the government is averse to. The majority of petroleum products is produced by the public sector and so there is little meaning to competition among these OMCs since the money is anyway going to the same destination and so costs on marketing and advertisements also make little sense which can be reduced or even done away with.

The revenue generated by government and OMCs from petroleum products must be used to invest in other sources of fuel and energy and to encourage the use of electric cars and also to encourage renewable sources of energy. Only then will our country have long term energy and financial stability. By taxing non-essential items like gold and jewellery, reducing taxes on this essential product and by investing the revenue generated to fund future stability and security, the government can protect the people, address financial issues and clearly show its commitment to good governance that keeps the interest of the people at heart. Only such an all round effort, can completely justify unpopular actions like increase in prices of essential items without inviting the people's angst against the government, will convince the people that short-term pains will evolve into long term gains and only then will the people reward the government with its support and confidence.