Retributions | On the Petrol Price Increase

A big screw-you to  the middle class?

Leaving aside the economic debate, it was certainly unexpected that the United Progressive Alliance (UPA) government would tolerate a 10% hike in petrol prices. The UPA government has been extremely cautious when it comes to economic decision making preferring to sacrifice reforms at the altar of populism.  It has failed to push even relatively benign reforms like increasing the limit on foreign direct investment in the insurance sector.  So what gives?

A cynical answer may be that the government realizes that any increase in petrol prices would lead to howls of protest; the substantial increase is designed to ensure that even with a partial roll back, the oil marketing companies would still be able to survive. If the comments of Congress spokesperson Manish Tewari are any indication, this scenario may already be playing out.

It was interesting that only the petrol prices were increased; diesel, kerosene and LPG  were left untouched even though they are largely responsible for the under-recoveries of the oil companies. Conventional political wisdom holds that the petrol is consumed by the middle class and the rich while diesel should be subsidized because of its cascading effect on inflation. However,due to the sharp difference between petrol and diesel prices, this dynamic no longer holds true to the same extent.  A report by the Center for Science and Environment suggests that from 4 percent in 2000 the share of diesel cars in new car sales has increased to nearly 40 percent. (Others have reported that the figure is as high as 50 percent.). Indeed, petrol cars now tend to be the smaller and are favored by the middle class while the gas guzzling SUVs are more likely to be diesel vehicles. With petrol prices far outstripping diesel prices, the sale of diesel vehicles is only likely to increase further. Nevertheless, despite the economic absurdity, it is still politically expedient to increase petrol prices while sparing diesel in the name of helping the ‘aam aadmi.’

But the crucial question remains: Will this hurt the Congress party politically? One view may be that this too shall be forgotten; people may be angry for a couple of weeks but then they would become used to paying higher prices at the pump. And the government could also decrease  prices before the 2014 elections to placate the middle class. On the other hand, it is also possible that the Congress party no longer cares for the urban middle class vote. It may well believe that because of the anger against corruption and general economic mismanagement, the urban voters may not be inclined to vote for the Congress in 2014 irrespective of what happens to petrol prices. Despite its outstanding performance in urban areas in the 2009 general elections, the Congress clearly believes that its victory was ensured by populist measures like the National Rural Employment Guarantee Act (NREGA) directed primarily at the rural voters. If the middle class is not going to vote for the Congress anyway, it makes little political sense to worry about increasing petrol prices especially when the central government’s fiscal situation is poor and it urgently needs additional money for new schemes like the universal pension for the elderly.

Finally, the debate needs to joined on what kind of future is envisioned for India. India  can become a quasi-socialist country—as it looks increasingly likely under UPA— with a relatively small middle class expected to pay for government largesse. Or it can become a pro-growth country with a strong social safety network which is limited in scope and innovative in nature. The Congress party led by Sonia Gandhi clearly believes that growth is incidental and all that matters is income transfer and statist schemes. Unfortunately, India’s economic growth has it self become a potent shaming device in this debate (Oh! How can we tolerate poverty in an era of 8% growth?) and indeed, the galloping economy over the last decade has allowed the government to get away with massive populism with little focus on India’s growth story. Yes, India’s poverty is heartbreaking but a country cannot build a first world social security network on a thirld world economy. In any case,  the chickens are coming home to roost and with the slowing government revenue, this conflict is only likely to become sharper and would demand clear answers from both the political class as well as the voters.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.