We encountered such propositions when crude prices were $30. This is counter-factual, but despite crude price increases, the Indian growth engine is chugging along. So we need to spell out the argument before accepting such pessimism as Gospel truth and the economic argument is usually conspicuous by its absence. Simulations and models aren’t substitutes for economic arguments, no matter how impressed we are with them. Denis Diderot was once invited by Catherine the Great to her court. Confronted by Diderot’s atheism, Catherine produced the mathematician, Leonhard Euler, who pronounced he had an algebraic proof of God’s existence. This formula was gibberish. But Diderot didn’t know mathematics and, thus embarrassed, returned to France. To return to oil, a tiny bit of the argument seems linked with imports and foreign exchange constraints. That may have been valid in the seventies and early eighties, but is that convincing now? Not only do we export petroleum products (value increases when crude prices increase), we have an embarrassment of forex riches. It is impossible to devise a convincing balance of payments argument for GDP growth slowing.

Next, one can think of an inflation argument. Life would have been simpler had administered price mechanism been scrapped in February 2002. Forget LPG and kerosene, subsidies on petrol and diesel have also become open-ended, with resultant distortions. Because of non-transparency through import parity pricing, refinery margins and indirect taxes (import duties, excise, state-level taxes), there is no obvious way to link crude import prices with the retail prices of petroleum products. If one considers WPI-based inflation, retail prices can be increased, at least for petrol/diesel. Depending on how much the increase is and depending on what is done to indirect taxes, we will probably have an increment to inflation rate by around 0.5 per cent, eminently bearable. But if one considers CPI-based inflation, this is a little less bearable. And if one considers the torpor of the government, nothing is bearable. Sure, China has increased petrol and diesel prices by 10 per cent and Malaysia plans to. But neither country is mis-governed by the UPA. So retail prices won’t increase and that knocks out any inflation-based argument. Note that macro models and simulations always assume higher global prices are passed on domestically. With that transmission mechanism missing, the GDP-dampening argument loses validity.

... contd.