Second, when distorted low prices do not reflect the full costs, it sends the wrong signals and consumption is more than is socially optimal. India meets about three-quarters of its petroleum needs through imports at an approximate cost of $50 billion a year. Increased consumption inflates that import bill and is economically wasteful.

Third, the burden of the opportunity cost of the subsidy falls squarely on the people who cannot reap its benefits. The resources that the subsidy consumes are not available for services that help the poor like subsidies for public transport, primary health and education.

Fourth, the subsidy is financed by bonds issued to oil marketing companies. These bonds represent a future liability. Essentially it is a mechanism employed by the present voting generation to secure benefits that will be paid for by the future generations who do not have the option to reject that burden.

Fifth, if prices reflected true costs, alternatives such as better public transportation system stand a better chance. It would lead to more conservative use of private cars causing less congestion and pollution.

The basic economic truth is that there is really no such thing as a free lunch. Today’s subsidy comes at a cost that will only grow, the longer the delay in pricing petroleum products at full cost. Raising the price at the pump is the simplest but the most politically risky solution. The UPA knows that and will definitely not risk losing power even if raising prices is for the larger benefit of the economy.

... contd.