On the face of it, a Rs.1.82 increase in the price of petrol may seem modest, given the successive hikes consumers have had to put up with over the past year. But set against the backdrop of persistent inflation and rising interest rates, the burden of the latest oil shock is proving too much to bear. Important constituents of the United Progressive Alliance such as Mamta Banerjee's Trinamool Congress have demanded a rollback and even the Congress party's initial instincts were to call for a rethink. Even though the Congress promptly fell in line, parties across the political spectrum understand only too well that the tolerance level of ordinary citizens has reached breaking point. From an accountant's point of view, the oil marketing companies and the Finance Ministry may be correct in saying that higher pump prices will help pay for the rising crude import bill that has been triggered by the rupee's depreciation in recent weeks. But it is the UPA's wider mismanagement of the economic situation — and its failure to evolve a rational urban transportation policy — that is solely to blame for the burden of adjustment being thrust squarely on to the shoulders of the consumers.
The government argues that a petrol price hike will not prove as inflationary as feared because it is not used as an intermediate product. But the fact is that petrol plays a major role in private urban transportation, especially for the middle classes and the salariat. One option the Finance Ministry had was to reduce the amount of indirect tax levied on petrol. Today, customs and excise levies on the fuel add up to Rs.14.35 per litre and a temporary reduction of around 30 per cent would have averted the need for the latest price hike. A temporary excise cut might have negative fiscal implications but public finance and sound macroeconomic management are all about prioritising outcomes. Given the current inflationary outlook, prudence would suggest doing what it takes to relieve pressure on the general price level. Here, it is not enough to claim credit for keeping the diesel price steady. Though a lower diesel price helps in keeping transportation and shipping rates down, it also encourages dieselisation of private transport. Data from the latest quarter indicates that the growth in diesel sales outstripped that of petrol for the first time in six years. Since diesel models typically cost more than their petrol variants, the ‘rent' from the use of diesel in private cars accrues mostly to car manufacturers. Apart from rolling back the latest petrol price hike, the government must craft an intelligent excise policy that does not enable auto companies to profit from the sale of subsidised diesel.
