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Tuesday, Nov 02, 2004

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Oil price hike: A blessing in disguise

Bharat Jhunjhunwala

India must use the opportunities thrown up by the oil price hike to promote fuel conservation, hydroelectric schemes and other mechanisms to escape the clutches of the oil producers.

THE Finance Ministry is worried about the impact of the price of oil. It has cut the import duty on oil to soften the impact of the price rise.

The Finance Minister has furthermore written to the State governments to reduce the sales tax on oil. But this crisis is also an opportunity.

While speaking to the National Italian American Foundation, Washington, DC on October 15, the US Federal Reserve Board Chairman, Mr Alan Greenspan, said: "The higher prices of the 1970s brought to an abrupt end the extraordinary period of growth in US oil consumption and the increased intensity of its use that was so evident in the decades immediately following World War II.

Between 1945 and 1973, consumption of petroleum products rose at a startling 4.5 per cent average annual rate, well in excess of growth of real gross domestic product. However, between 1973 and 2003, oil consumption grew, on average, only 1/2 per cent per year, far short of the rise in real GDP." Resisting the price rise would have prevented such a fortuitous adjustment of the US economy.

It would do the same for India if the Government persists in its efforts to neutralise the increase in the price of oil. The share of services — which generally consume less oil than manufacturing — rises as the country develops. The increase in the price of oil will push us faster into this right direction.

The producer is always adjusting his business according to the prevailing price situation. The availability of relatively cheaper LPG has made a large number of rural people switch from gobar gas and fuel wood leading to conservation of forests.

The same applies to the price of oil — in reverse. The high price of oil should lead to a switch to gobar gas and other sources of fuel for conservation of economic prosperity. This is the natural adjustment that must happen.

Tax relief on oil means that other non-oil consuming sectors will be taxed at a higher rate to make up for the shortfall in revenues from oil consumers. Those not consuming oil will be taxed to subsidise those who consume more oil. This will encourage greater consumption of expensive oil.

Software would be taxed to subsidise steel. Sacrificed would be the sectors that continue to be efficient to support those that have become inefficient. It is like taking the tyre from the new car to replace that of the dilapidated one. In fact, the government should impose high excise duty on domestic producers of oil using the shield of high price of imported oil and converting this crisis into a revenue-generating mechanism.

The role of oil in India's economy is less than that of the industrial countries as well as competitors such as China. India consumes less oil per dollar of national income than most other countries. Other oil-guzzling countries will be more severely affected by the price rise than India.

The West Asian Arab countries are set to have a huge inflow of income from this rise in the price of oil. A large number of Indians are working in these countries and sending back remittances. The demand for these workers will rise. Notably, this source of income has assumed importance after the price rise of the 1970s.Higher levels of foreign investment can flow into the share market.

In the 1970s and the 1980s, the oil exporting countries invested their petrodollars largely in the US. The dollar was the rising currency at that time. Petrodollars were used to buy prime property in New York and gobble up American corporations. But things have changed. The dollar is on the decline.

The US is running a huge budget and current account deficit. Technological innovation — the engine of US economic growth till the 1990s — is at a virtual standstill. In fact, world research and development is moving to India in order to use the services of less expensive scientists and engineers.

There is a good chance that India can draw the petrodollar flow. Then, India would benefit at the cost of other oil consuming countries. The big money paid by oil importers would eventually flow to India.The Reserve Bank of India Governor, Dr Y. V. Reddy, says that India need not worry about the impact of high price of oil because of the adequate forex reserves. That would be like selling the family silver to have a sumptuous meal. The attempt must be to reduce the consumption of oil.

The correct way is to use the forex reserves to promote fuel conservation, hydroelectric schemes and other mechanisms that would get the country out of the clutches of the oil producers.

The focus must be on the opportunities that the oil price hike is opening for us. True, the people will be affected by the inflation. But they need to be taken into confidence. Just as one does not wait for the rains to cease during floods to move to safer high land, similarly we should not wait for the price of oil to fall to promote sectors that consume less oil.

(The author, a freelance writer, can be contacted at

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