The Hindu Business Line : Does keeping a lid on fuel prices really help the poor?

Political compulsions have made the Government keep prices of petro products down despite global prices going through the roof. It would be more prudent to come up with a credible targeting mechanism and protect only the vulnerable sections, as putting a lid on prices may end up helping only the rich.

V. Kumaraswamy

Crude oil has been on the boil and its price is rooted at $90-plus per barrel for a fairly long time, and there are no visible signs of it coming down any time soon.

Other than a few noises here and there, the Government seems clueless on its action plan. The more it dithers the more steep would be the hike required to correct the imbalance. As usual, the nation seems set to reap ‘democratic dividends’ of indecision.

The usual rhetoric and arguments of the Leftists are at the core of this indecision. As with many cases, the argument of protecting the rural and urban poor is hopelessly hollow in this case even as the needless dithering is causing huge deficits for the oil companies which will soon get reflected in the Union Budget deficit. The FRBM claims of having controlled the deficits will be meaningless without taking into account the oil deficits of the PSU oil companies.

The reality

Who benefits and who suffers by the Government’s indecision and how much do the poor benefit and how much do the rich gain? Let’s begin by examining the impact on the urban and rural segments.

Rural areas: The rural poor can get affected: (i) if the direct incidence of price hike on their consumption of oil and its derivatives is significant, (ii) price of any other purchased inputs raise sharply or (iii) if their output prices suffer. Similar arguments will hold for urban poor as well. Let’s see the impact from each of these.

Petro-products in rural areas are mainly used as fuel for cooking and lighting and for running tractors. The percentage of people using baser forms of fuel like wood, crop residues and cow-dung in rural areas is as high as 90 per cent in our country. These people may be at the bottom-most pile and may not derive any benefit from the Government’s inaction. It is difficult to imagine that this segment which cannot afford kerosene and LPG for cooking will use them for running tractors in their farms. The 6-7 per cent using kerosene and LPG are at the richest end in the rural areas and may not deserve protection.

Higher diesel and petrol prices may affect prices of farm inputs like fertilisers and prices of manufactured articles may go up due to higher freight. There is a separate subsidy mechanism for fertiliser which can be worked out to cover the impact.

The price increases of manufactured articles from urban centres are unlikely to affect those below the poverty line and landless labourers since their only or main consumption will be food which is locally grown and consumed. With the marketable surplus from rural areas, which is what is exchanged for manufactured products, being minuscule as a proportion of GDP, the impact is most likely be marginal. Price inflation of manufactured products affects urban population far more seriously.

Impact on urban poor

Farm output prices transported from the rural to urban centres may increase but is unlikely to affect the rural population since it is at the originating end of the traffic. It is more likely to impact the urban poor who are at the receiving end of the traffic. Since nearly half of rural population uses kerosene as the main source of lighting, price hikes on kerosene will impact them; but lighting and cooking fuels together account for less than 7 per cent of their consumption. Even if lighting is half of this, even a 20 per cent kerosene price hike will result in less than 0.7 per cent impact on their total consumption. There may be ways to subsidize this impact.

Urban areas: Since 90 per cent of urban lighting is electricity-based, the impact of higher prices of petro-products will be derived from coal price hikes and is unlikely to be as severe as for those using kerosene for lighting in rural areas. The percentages of households using firewood, kerosene and LPG for cooking in urban areas are 28 per cent, 21 per cent and 46 per cent respectively.

Those using LPG are at the top end and may not deserve protection. Firewood prices may rise due to freight increase but freight is only a fraction of the total cost of firewood. For those using kerosene the impact is direct. Ways have to be devised to reduce the impact on them.

Food prices

The urban poor could be hurt by food price increases resulting from a hike in cost of transportation of food articles. If the hikes on public transport are contained hopefully the impact due to the latter can be contained. Bulk of petroleum energy is accounted for by transport, industry and power generation and domestic consumption accounts only for a tenth of total consumption. While mass transportation may merit protection, it is difficult to see how and why individual transportation should be insulated; as people having private transport belong tothe highest income bracket.

Undeserved subsidies

Dithering on price hike is only overcrowding our roads and aiding pollution. While transportation cost of goods is likely to be impacted heavily, foodgrains transport (which merits the most protection) accounts for less than 10 per cent; it is difficult to see how transportation of mineral ores, manufactured goods like refrigerators and TVs and the raw materials for them, chemicals and computers, etc which account for the balance need protection. (After all, the accumulated impact will one day fall on them so it is better rationed over time.)

On close examination it appears that the petroleum intensity in the consumption basket of the bottom 70 per cent of the population may not be much.. Its intensity increases as one’s income level increases. By trying to catch them all in one canvass, the Government is only doling out needless subsidies to those who least merit it and who may ultimately one day pay for it when the Government is forced to adjust the prices. The logic of protecting the poor sounds too hollow in this case.

The Government needs to stratify the consumption groups and come up with a more realistic mechanism for price hikes which deliver protection to only those who truly merit it rather than get cowed down by hollow rhetoric.

(The author is CFO with a large paper company. The views are personal. Comments can be e-mailed at kumarviru61@yahoo.co.in)