The public have just voted us into power. We should not respond by raising the price of petrol and diesel — thus was the politicians’ response in June to the government’s proposal to deregulate the price of petroleum products. ‘The Maharashtra and Haryana elections are around the corner. It would be politically imprudent to tamper with the pricing mechanism at this juncture’. Such might be the political reaction were the newly constituted Parikh Committee to recommend that domestic prices be aligned to international prices. The quotes are of course, my paraphrased version of corridor whispers, but they do provide an insight into the dynamics of decision-making and in particular, the dominant influence of the politician (as distinct from the government). Notwithstanding logic and evidence when economic push comes to political shove, political perception seems always to trump economic fact. This is not unique to the petroleum sector. It is the case with all economic activities that have a mass impact.

I am not stating anything new. The skewed power equation between ‘good economics’ and perceived ‘good politics’ has been the subject of much commentary and discussion. This article could well be critiqued for flogging an oft beaten donkey. I do so nonetheless because of concern at the growing economic costs of current political inaction. The enormity of these costs can be gauged from three sectoral estimates.

First, petroleum: it is well known that the oil marketing public sector companies ratcheted up losses in excess of Rs. 50,000 crores during FY 2008-09 because the government-administered sales price of diesel, petrol, kerosene and LPG was less than the market-based costs of acquisition. The reason these companies were not bankrupted was because of the government oil bonds — paper IOUs — that bolstered their balance sheet. A corollary of this policy — the costs of which in terms of lost productivity, operational inefficiency and shoddy service cannot be quantified — has been to kill competition. The oil bonds are not offered to the private sector and this has so tilted the playing field that all private companies have had to scale back their ambitions. Second, power: a just published report states that the opportunity cost of power outages, theft and captive generation is in excess of Rs. 200,000 crores annually. And third, infrastructure: McKinsey has written that if the current trends in inefficiency regards the development of infrastructure continue over the 11th and 12th plan periods (2008-2017), the country will suffer an opportunity cost loss equivalent to almost 18 per cent of GDP in FY 2017.

... contd.