The government has a Diwali gift and one shouldn’t look a gift horse in the mouth. That phrase first appeared in print in English language in 1546 and refers to assessment of a horse’s age by examining its teeth. That is, one might have got an old horse as a gift. While on horses, Virgil warned the Trojans to beware of Greeks bearing gifts.

The Diwali gift in question is a decision not to increase prices of petroleum products. However, gifts have a habit of becoming permanent, what with elections in Gujarat and Himachal, with others to follow — perhaps even a general election. This gift is not only of an old horse, it may even be a horse with an army inside it, since the gift has costs. No one knows where international crude prices are headed, but they are close to $100. Apart from temporary uncertainty (Turkey-Iraq) and perhaps even speculation, winter, not to speak of dollar depreciation (triggering switch to commodities), Chinese and Indian growth has driven global demand and there are OPEC supply controls. We may not know the exact figure, but crude oil prices will remain high.

There is crude and crude. The average price of Brent crude (one that is usually quoted) isn’t the best indicator. This sounds like sauce out of Chinese cuisine. Crude can be sweet and sour. Sweet has less sulphur. Sour has more sulphur and is cheaper. Brent is sweet. But because India allows higher sulphur content, a large chunk of our imports is sour. One gets a better sense of Indian import basket costs if one weights Oman/Dubai (sour) and Brent (sweet) in a ratio of 60 to 40 per cent. The simple point being that the Indian import basket will be a little (perhaps $5 now) cheaper than price usually quoted in the media. The media will also report that increases in crude oil prices will reduce Indian GDP (or industrial production) growth. Drawing on macro-models and simulations, the favoured figure seems to be that a $10 increase in global prices reduces GDP growth by 1 per cent. The Approach Paper to Eleventh Five-Year Plan (2007-12) echoes this sentiment. “Simulations with macro-models suggest that if oil prices increase sharply in future, our growth rate could be lowered by between 0.5 and 1.0 percentage points below the levels projected with present levels of oil prices.”

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