When the price of crude oil was above $70 a barrel there was a steep rise in the prices of petroleum products. None but the “left” complained. We all thought that it was a correct economic decision. But as this article suggests, we are definitely missing the grand picture. The argument is petroleum products are not as costly as they are made out to be. How?
Roughly 50% of the price of petrol and diesel is Central and State taxes. It is the greatest revenue earner for the states and center and no body wants to let go this easy money. It is an indirect tax and is sustained by the adminstered price mechanism followed by GOI for oil.
The second reason is even more convincing. The administered currency value of the Rupee is yet another reason. The government is pegging the Re lower to make the exports cheap. But this has long term detrimental impacts.
1. Imports become costly. Roughly 2/3 of the oil is imported and hence is costly when compared to other countries. Oil is an important ingredient for the growth of economy and the rise in prices stifles it and also gives rise to inflationary trends.
2. Pegging the currency lower gives rise to higher inflows resulting in the increase of our reserves. But this should be a temporary step not a permanent one. The currency should be allowed to come to its own value, otherwise these built up reserves will vanish in the same way they accrued. In fact the over emphasis on reserves itself is useless as it is kind of a soft loan to US earning an interest of just 2%.
Economists think that the actual value of a Rupee is 9 to a dollar. The article also says that it would take 10 years for this exchange rate to get stabilized if the government control on exchange rate is removed.
Is there any other repurcussions for the actions suggested by the author of the article? Assuming that full convertibility is right, when is the best time to do it, during a economic downturn or otherwise?
Any economic gurus out there please clarify?
