Deregulation of Petroleum Products in India: Half-Baked Economics

Following exactly the same economic philosophy of UPA government at the centre that inspired it to deregulate the price of petrol, NDA government very recently left the determination of diesel prices to the mercy of market. Notwithstanding certain explicit gains visible at a glance in the immediate term, this move will become catastrophic in the long term on account of two reasons. First and foremost, this policy is based on the traditional economic philosophy that unfettered competitive market is the best mechanism to achieve efficiency in the distribution of resources. Therefore, government must not intervene in the functioning of the market through subsidy or taxation so that both producers and consumers will be free to enter and exit such a market. This kind of freewheeling system will supposedly determine efficiency and therefore, government can get rid of the head-ache caused by subsidy and consequent macroeconomic implications.

However, the champions of this philosophy knowingly or unknowingly neglect several important factors that reign the market for petroleum products. Among them, the most crucial thing is either negligence or ignorance of the fact that market is like a scissor with two blades equal to each other in all respects. The true purpose of a scissor can only achieved if it is designed keeping in view the compatibility of two blades to each other. Therefore, even if we accept the view that market alone can guarantee efficiency, for the sake of argument (because truth is that market alone cannot work efficiently as has been proved time and again, for e.g. US economic crisis in 2008 and also considering our metaphor of scissor, it will not cut on its own if somebody does not make use of it), a close look at the existing market for petroleum products shows that it is like a broken scissor. That is, two sides of the market namely demand and supply is suffering from fatal shortcomings.  Let us consider the demand side first. With this new policy government of India wanted to make market for petroleum product like petrol and diesel competitive as well as unfettered. Of course, that is the way government must have gone to achieve the goal of making a market competitive to the extent possible. However, the designer of the scissor should pay attention to the design of one blade while designing the other one so as to avoid incongruity. Here what we have seen is complete neglect on the part of government to look into other side of the market, supply side, while designing Indian demand side of the market for petrol and diesel.  

What I mean is that the supply side of petroleum products is completely out of the control of Indian policy makers and it is fully controlled by international oligarchs which are best examples of the imperfect markets. Thus, our government is preparing ground here to make it perfectly competitive on the demand side while the supply side is imperfectly competitive in toto. In other words, government of India is striving to design only one blade (demand) of the scissor under its control in a perfect manner to enable it to deal with a broken and often self-indulgent other blade (supply) of the scissor like oil producing and exporting countries (OPEC). The ultimate result can be easily presumed that perfect blade will be blunted in the process of dealing with the broken blade and finally the system will collapse and people of India will only be true losers.    

Of course, as I pointed out at the outset, there would be certain fringe benefits in the short term in connection with this deregulation. As reported widely in news papers, given the opportune timing of the introduction of this policy at a time when international oil price was falling, this move has immediately resulted in the decline in the price petrol. However, we have to wait and watch to bear the true brunt of this policy.  It is here, the second important factor namely geopolitics in the Middle East comes to picture. Nobody believes that dust in the Middle East air will settle soon especially in the face of an ongoing violence and if Middle East politics is on fire, so will be the economics of crude oil. Thus, the deregulation policy of union government will be put into test in the days to come and if ongoing volatility in the Middle East explodes further, government will have to review its current policy decisions at some point of time in future. After having said all these methodological and philosophical lacunae, I acknowledge that nobody can justify wastage of public resources disbursed in the form of subsidy to undeserving segment of the society. Therefore, looking in that way, this policy is a welcome step provided that government ensures that subsidy reaches the needy as market would not take care of the issue of equity. Also government must pay attention to reduce India’s reliance on imported energy products for which plenty of available domestic sources with an emphasis on renewable energy sources must be tapped.