Usually, economic recessions are coupled with commodity price recessions. What is different in this recession is that commodities are still not easing at all. Oil climbs everyday to new highs. Metals, gold, foodgrains are still bullish. Part of the reason is the significant dollar weakness, but this alone does not explain the significant price inflation in commodities.
The reason is not too difficult to fathom. China, India and the developing world is using up more and more of basic materials, and this is causing their prices to rise. On top of that, the Indian government is trying to use fiscal measures to stimulate the economy (it desperately wants to keep inflation low in an election year, although by doing this it is curtailing growth in sectors that are really suffering - export dependent sectors for example, which will continue being hit as dollar flows seeking higher debt returns cause appreciation of the Rupee, or realty, or autos). But this post is not about the ills of the lame duck Indian government.
The problem with fiscal measures is that they benefit commodity producers more than they benefit the Indian economy. In an environment where oil and fertilizers are massively subsidized, fiscal measures cause more use of these commodities because of the unnatural price cap. This benefits OPEC - both for oil and fertilizers since natural gas is the biggest raw material in fertilizer production, not India.
How can this situation be balanced? And now we come to the (not so) radical idea - that oil prices in India should be de-regulated. Not only de-regulated, but the subsidy on diesel and keroscene at the cost of petrol should also go. Though this will cause some pain in terms of inflation, the long term benefits will be massive:
- Prevention of leakages in fiscal stimuli to the economy
- Less waste of taxpayers money, which could be used to fund massive infrastructure build
- Environmental benefits, as the normal demand-supply economics curtail use of oil for transport, in polluting diesel generators, and in wastefully inefficient industries
- Less congestion on roads, better use of public transport, and saved time from efficient travel
- Less dependence on fertilizers and pesticides in farming produce (and therefore better long term health benefits, with lower wasteage in terms of health costs)
To me, it is unclear why the government does not see this long-term solution to a lot of our problems.
3 comments:
it's pretty clear to me - political expediency!
the idea is old - oil prices were already official deregualted in 2001. but inflation is too big an item in election for anybody to touch it.
and why india, wouldn't the west be also better off without the farm subsidies?
yes, but the deregulation in 2001 was half-hearted. and the inefficient subsidy structure - lpg, diesel artificially cheaper than petrol - was still not tinkered with.
As for farm subsidies in the west, the delivery is much better. by all means subsidise poor farmers, but not by encouraging waste in the form of free water, free electricity and free fertilizer. give them cash directly, and let them pay for these things (like it is in the west). this way you incentivize efficient and frugal usage of scarce resources
Subsidy should go but it wont...at least not in the foreseeable future. The political cost of this will be huge+ there is the left.
Its something similar to reservation - once you turn it on, you cannot turn it off.
The only way I see keroscene/lpg subsidy going is that crude drops below whatever level it takes to remove ~Rs.17/litre from cost of refining keroscene and ~Rs200 from cost of production of LPG...i am guessing it would be about $30-40/bbl
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