The diesel price hike gives the correct signals
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The diesel price hike is a major step in the right direction, giving appropriate price signals, reducing infructuous subsidies and hopefully leading to a much needed fillip to productive investment in public infrastructure. It is well known that a substantial part of the subsidy is diverted to the black market by criminal elements. A senior Mumbai journalist was killed by elements who reportedly did not want his story on the diversion of tankers on the high seas to appear in the news. At first, diesel was taken on black prices from pumps, then road tankers were diverted and finally ships were diverted.
The notion that diesel demand is perfectly inelastic is wrong. We know that in the mid-seventies, when India followed a high energy price policy after the first energy shock, POL demand was stagnant and the country is regarded as having been very successfully in fighting the crisis. The price of an input is a cost but it also gives a signal for the resource use and that will have salutary consequences, including for the environment.
There are two aspects that need attention. Every fuel policy report from the Chakarvarty Committee onwards, some of which I have worked on, has asked for the rationalisation of diesel prices. One aspect is the provision of cooking energy in the hill areas because kerosene will be substituted by the cutting of down trees. A well-targeted Aadhaar-based supply of the fuel to these small but important populations is needed. A recent version of this is there in the Planning Commission's Fuel Policy Report reportedly accepted by the PM. The second issue is that support to the agricultural sector has to incorporate the impact of this hike.
Finally, we may like to note the positive signals rationalisation gives for private investment. When kerosene and LPG prices were rationalised in September, I was travelling to two major global financial centres on invitation from a global financial consulting group to meet their India investor community. I knew of some reform coming, but their interest was extraordinary particularly on the political aspects. At that time, they were sceptical of India, talking of a hard landing for the country. I told them that the politics would be managed and that this would lead to more Indian-style non-big bang reforms and hence India's growth would be closer to 5.9% rather than 5% being projected then. These men who manage billions have been sending messages since and the IMF has now given its 5.9% estimate.
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