Petrol price rise and popular anger

Petrol and diesel prices have been skyrocketing for the last few months. The government of India, in its wisdom, decontrolled petrol/diesel prices a few years back and this eliminated petroleum subsidies which were at an unsustainable level. Since 80% of our hydrocarbon energy requirements are met through imports, any rise in crude price at the international market should result in upward movement of  petrol/ diesel pump price.

Mainstream, as well as social media, is flooded with comments that Central government is responsible for higher fuel prices and it is taxing heavily on it. Let us examine this issue in deeper.  

Sin good or engine of growth?

Contrary to popular belief, petroleum products are highly taxed commodities in most parts of the world except in the Middle East. There is a logic and rationale behind this high tax rates. Petrol is a unique commodity which can be termed as a Sin good whose consumption should not be encouraged because of the particular kind of ‘Public bad’ and negative externality it creates.

Classical sin goods are those goods whose consumption is harmful to the individual consumer and hence considered harmful to the larger society as well. Cigarettes, junk foods liquor, etc are examples of such Sin goods, and hence are taxed heavily. However, petro-products are slightly different. Unlike Cigarettes, individual consumer of petrol, ie a private car owner, is a beneficiary of his own consumption while the adverse effect is borne by larger society. To make it simple, it is like this. A passenger inside a car is happy with the privacy and comfort he enjoys, while the men outside the car become a victim of the pollution that it creates. Hence, the consumer is bound to pay a tax for the ‘Public bad’ that he creates. Any decrease in tax will only encourage further consumption and more comfort to the car owner, while more pollution to the pedestrians and people living in that city.

However, people who don’t own the cars are also pinched by rising fuel prices because fares of public transports will also likely to increase. People in general henceforth will tempt to support lowering of prices and taxes without realizing that indirect costs borne by him through increased pollution and reduced government revenue (hence reduced government welfare measures) will be much higher than the benefit he accrues.

On the other hand, consumption and use of petro products are heavily interlinked with economic growth. When GDP and people’s income are growing, their transportation needs increases and hence consumption of energy is bound to grow. In this regard, any artificial suppression of energy consumption is bound to adversely affect economic growth and living standards. Hence government all over the world, try to do a tightrope walk by increased taxes and encouraging fuel-efficient economic activities. 

People refuse to believe that the higher pump price is the consequences of an increase in international crude price. Ordinary people often tempt to blame somebody when they perceive something is going wrong. We generally believe that when things go bad, it must be because of someone who would be conspiring against us. We always love to believe in conspiracy theories and hence like to blame 'evil businessman' who owns Oil companies, petrol pump owners, corrupt politicians for increasing oil tax etc. We ignore the reality that prices of crude oil are arrived by global market forces are based on a number of factors and India is simply a price taker in it. Yet, unfortunately, the central government is the favorite whipping boy in this matter

We, as human beings, according to public health activist, Hans Rosling, is also infested with negativity instincts and notice bad things more than the good. We often misremember the past and tempt to think that petrol prices will continue to increase despite the truth that every commodity undergoes a price cycle.  Hence prices keep falling and rising but we remember only the pain points. Remember, when crude is rising, food prices like Dal, Grains, sugar etc became cheaper and inflation is at its lowest. We always have an illusion of deterioration, while the truth is that things are improving gradually.

In this context, if we ask any ordinary Citizens whether the government should 'reduce' the price (by cutting down tax rates), we will get an affirmative answer that the prices should be brought down. Many will even argue that Government should ‘fix’ petrol price as it was earlier, without knowing that the government was incurring huge and unsustainable subsidies for ‘fixing’ it.  If more probed on how then the government will find more resources or how it will reduce expenditure correspondingly, mostly we will get a blank look.

People want simplistic solutions to every complex economic issue and most people form opinions on their own without having any deeper understanding of complexities and intricacies of it. People falsely believe that government can fix the prices of commodities while the truth is that it can’t.  The primary economic activity of the government is to collect taxes and spend it wisely for the overall welfare of the people. Governments can, of course, influence prices of commodities through taxation, subsidies, regulatory frameworks, ensuring competition etc but can’t increase or decrease prices of commodities by its own. Any such move to control prices will result in disastrous consequences. The best form of government is the one which interferes least in the market prices.

People are also unaware and unsure of their earlier positions. Interestingly the same people who were supporting the Odd-Even scheme in Delhi (for reducing pollution) now want reduced petrol prices which will paradoxically increase pollution. In Kerala, it is the environmental activists, who were forefront in protecting paddy fields, now want cheaper petrol. Few months’ back media branded New Delhi as the worst polluted capital city in the world. Now, the same media want people to consume more petrol by reducing taxes on it. Similarly, the Right to Food activists who wants cheaper food for all, wants the petrol taxes to be reduced without knowing where the money for cheaper food will come from.  

However, there is no surprise to all these seemingly contradictory positions of individuals/activists and governments. In reality, according to author Yuval Noel Harari, we have multiple selves and each self, behave as per its own wishes and fanciful ideas. This contrarian and incompatible positions and opinions are very much a part of human existence in this world. Human minds have different drawers and compartments and each need not be talking to others. A human being can switch to different identities as the need arises and offer contradictory opinions on multiple issues without being aware of inconsistencies in their own arguments. 

The best way for the government is to ignore and sidestep any demand for ‘reducing’ petrol prices. Sure, people are angry towards the price increases. But once the price gets stabilized, in the medium to long-term, people get anchored to new prices and will either shift to new consumption curve or will change their consumption pattern accordingly. The finance minister should sit, relax and need not do much in this regard. Let the market forces play by its own and get it adjusted.