Fuel price cuts are a populist demand

Fuel price cuts are a populist demand

The Opposition might think it is voicing popular anger over ever-higher fuel prices by making that the central point of its united strike action, the Bharat Bandh. But this is populist and potentially counterproductive. Global oil prices could well come down, say, if the US strikes a deal with Iran that could bump up the latter’s production. Would the Opposition start praising the government then? For Congress and its allies to pretend that, were they in power, global oil prices would, somehow, have moderated is silly.

Higher prices of crude in global markets reflect strengthening economies around the world and geopolitical tensions that could depress oil production from Iran. The only way the government can bring down the final retail prices of petrol and diesel is to slash taxes. Lower revenue would raise the fiscal deficit or force expenditure cuts. Making petro-fuel less expensive will bring down transport costs, true, but that does not mean inflation would hold down across the board. Indirect taxes on petrol and diesel account for a sizeable chunk of the Centre’s tax revenues, and lowering these levies will widen the fiscal deficit. The government would then have to depend more on non-government sector’s savings to finance its spending. If the private sector does not have savings to spare after its own investment, such government borrowing will create excess demand and increase prices.

Therefore, lowering fuel prices will push up the general price level unless the government raises other revenue to make good this revenue loss. Lower fuel prices would take away any incentive to moderate consumption of fuels. It makes better sense for the Opposition to engage in a constructive dialogue to bring petroleum products under the goods and services tax.