Nobel prize-winning economist Douglass North observed that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.” Frequently basic economic truths are willfully disregarded in a cynically calculated process of short-term electoral gains. In the long run, however, the practice of politically motivated economically unsound policies has the unsurprising effect of impoverishing the economy.

India is a case in point. Despite being endowed with substantial human and natural resources, it has failed to provide the majority of its citizens the basic necessities for a decent life. An important contemporary example of a flawed economic policy is the subsidy that the consumers of petroleum enjoy.

The price of a barrel of crude is hovering around $100 and yet the price of petrol at the pump remains essentially what it was when crude was selling at half that price about a year ago. The resultant gap between the cost and the price has to be bridged through a subsidy that is estimated to be around Rs 70,000 crore this year. The case is made that by keeping the price artificially low, the so-called “common man” benefits. But that is certainly not the case. It is a perverse subsidy for a number of reasons.

First, it is the “uncommon man” who actually benefits directly from the subsidy. In fact, the wealthier you are, the more vehicles you own, the more subsidy you capture. For every litre of petrol or diesel you consume, you benefit by around Rs 10; for every cylinder of LPG, someone else chips in Rs 250. The really poor person does not own cars or have a gas connection.

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