A perfect storm

The Jasmine revolution(s) underway in Egypt, Libya and other parts of the Arab world have affected crude oil prices tremendously. Brent crude is now within striking distance of its all-time high of $147 / barrel. India, which imports more than 70% of its crude oil requirements, is going to be a big victim of this spike.

The Indian nation finds itself in a familiar position - caught in a cleft stick with no hope of redemption. Oil prices cannot be raised under the current APM dispensation since inflation is currently very high (more on this later). However, burgeoning oil prices would mean higher subsidies and consequently higher fiscal deficit. This is bad for the entire country since a) government borrowings would crowd out private investment which we sorely need b) it would increase cost of debt as the country's ratings would suffer and c) it would place downward pressure on the currency, thus making oil imports even more expensive.

The reasons why we find ourselves in this hopeless situation are also familiar. When times were good, our government paid no heed to fiscal consolidation and kept the money spigots open. This money lined the pockets of esteemed gentlemen like Suresh Kalmadi / A Raja and got stashed in Swiss bank accounts. So now when times are bad, we find ourselves in the situation of the grasshopper who did not save anything for the winter.

The key question now is - what can be done. I have a somewhat radical and easy solution - reduce taxes (Excise / customs / sales) on petrol products to very minimal. Currently, 40% of end prices are made up of these taxes. Simultaneously, free ALL crude products to market prices. This will a) prevent many more deaths of conscientious officers trying to prevent petrol adulteration with kerosene b) improve the environment c) create a demand curve where high prices will translate to lower usage and vice versa. There will be no upward pressure on inflation since the money supply in the system will remain constant (inflation is and always is a monetary phenomenon). This has been categorically stated by many more learned gentlemen than me in the government's own committees. To help the really needy, provide coupons to them which they can redeem to buy LPG / kerosene at market prices.

However, I do not this this solution will be adopted. This is because a) we have a venal and inane opposition who only like to play one-upmanship, the country be damned and b) we have an equally venal and inane government which does not believe in decisiveness, the country be damned.

So, by popular vote, the country IS indeed going to be damned!