In the backdrop of the recent decontrol of
diesel prices by the BJP government, it is pertinent to revisit the risk of
cost-push inflation when the crude price will again reach peak level of around $140
per barrel. With addition of taxes from central/ state governments, it can
reach as high as 90 per litre. Will not it pose a huge effect in RBI’s plan of
inflation targeting of within 6 per cent by Jan 2016?
Let us go a little deeper into the
broad reasons of a continuous fall of crude prices from 2012. Firstly, the US
has turned into a net exporter for the first time due to huge exploration post
2008. Secondly, the OPEC countries of the Middle East have gone into price war
for their market share. Thirdly, the economic outlook of the Eurozone is very
bleak leading to lower demand from this part of the world. Last, but not the
least, some of the Asian countries are deregulating prices of oil sectors in a
world of declining crude. So, the subsidy bills going down leads to increase in
prices instead of the crude price fall, leading to dampening demand.
India is the fourth largest consumer of oil worldwide after US,
China & Japan *. So, running a subsidy regime covering all sections of the
society is not at all an efficient move by the government.
In the Indian context, there was a clear case
to end the regulation regime . The opaque nature of the pricing by the
government where government impose tax and give subsidy on the same product was
not welcome.
But considering the mid-term nature
of the dampening factors of oil demand and a fresh price shock in 2-3 years’
time make a case for creating a cycling buffer by the government. Such buffer
is present in banking sector also, and the RBI has repeatedly vowed for its
maintenance by the commercial banks. An autonomous regulator in the model of
GAIL should be created which will manage
this buffer fund and will come into play when our crude price will be sky
rocketing and will have cascading effect on our inflation numbers. The buffer
would be created by keeping apart a part of tax on diesel by both central and
state governments. It will save our economy from the price fluctuation internationally.
. These doses of regulation should always be there to smoothen the economic activities,
and also to save our poor people from inflationary risk, which is actually a
form of regressive taxation for them.
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