India Political Blog

Sometimes, Governments get feedback from the citizens in ways that they cannot anticipate. One example was seen in the recent issue about the VAT rates on diesel, implemented by the Delhi Government. The Commonwealth Games to be hosted by Delhi in October is sucking in more money that anticipated, and with delays, especially for the various infrastructural work that has been getting delayed, the cost over-runs can be fairly large. All this needs more money, and to some extent, the central Government wants the Delhi Government to generate some of the enhanced revenues needed. And it is quite clear how the esteemed chief minister of Delhi, Mrs. Shiela Dixit, feels. She has expressed an opinion earlier that the citizens of Delhi can afford to pay more for services such as electricity, and can also be used to generate more revenue by increasing the rate of tax on even essential items.
And so, the Delhi Government increased the VAT rate on diesel to be 20%, leading to an immediate increase in the rate of diesel. Such a move shocked people in Delhi, but the Government would have thought that they could even get away with something like this. After all, if the citizens of Delhi do not even protest at the huge amounts of money spent on maintenance of roads that do not even last one rainy season, or that the MCD has a huge number of fake employees on its rolls, so as to steal more money in terms of salaries for these fake employees; then the Government would seem to be justified in increasing such a rate.
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The Government went in for a partial decontrol of the prices of fuels, with giving a full decontrol of the price of petrol (and promising that future prices will be linked to international prices of crude); the prices for diesel have not been fully decontrolled, and the prices for cooking gas and kerosene have been kept away from decontrol although the prices may have been increased. The Government has been able to do this since politically the opposition is not at a very high pitch with the BJP still in some amount of disarray and no other opposition of any note.
Now, the Government is making noises about moving away from price decontrol over diesel. This is something that is much more serious than the decontrol of petrol. Petrol is perceived as the fuel for individual vehicles (and thus increase in the budget for those who can afford private vehicles), while diesel is the fuel used for the transport sector, for trucks, smaller carrier vehicles, and even for a number of goods trains that are not hauled by electric engines. The normal impact of a hike in the price of diesel is an increase in the rate of inflation, which is why the Government seems to be speaking about price decontrol of diesel, in order to gauge whether it can ride out the impending political storm.
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Finally, the Government seems to have taken a decision to move away from populism. The Government is drunk on the money that it earns from fuel, since it needs to provide funds for all the social welfare programs that it has launched, so there is no question of a reduction in fuel duty and excise rates. For some time now, since the Government has been in a precarious position politically, it has not had the courage (not only this Government, but the previous version of this Government, as well as the BJP Government that was ruling before that); so the Government would rather eat the extra cost and provide a subsidy in order to avoid increasing the price of fuels. Worldwide, there is a concept that providing a subsidy on fuels really has no appreciable benefit, in fact, the reverse happens. If the price of a fuel rises, and people accept that the Government will indeed increase the cost when the overall price of crude rises, then their behavior will be tempered by that realization.
A profound example of that is in the United States where the fuel prices are linked to the overall price of crude, and when international prices went almost touching $150, people changed their habit, with more car pooling, more usage of public transport, and avoidance of unnecessary trips in their vehicle. It also encouraged a strong movement towards moving towards more fuel efficient vehicles, with the status projecting large gas-guzzle SUV’s no longer being in fashion. Such is the behavior that one would want to see in Indian consumers, and our cities could do with more people trying to become more fuel efficient, going in for discarding those gas guzzlers, and more usage of public transport.
Another problem that the non-passing of such costs were that they were killing the oil marketing companies (and had already killed the concept of private companies being involved in the business of retailing petroleum products such as petrol and diesel since they could not match the subsidies being given by the Government). The amount of losses they had to bear were unsustainable, so if the Government really has the resolve to go through with this decision, then it is a good step. The next step would be for the Government to also take a look at whether the current level of excise and taxes is too high, almost like fleecing the customers.