Boiled in oil

SACRED texts describe assorted hells and a recurrent image is of sinners (in hells) being boiled in oil. If there is one sector that illustrates the pitfalls of non-reform, or of half-baked reform, that's oil. Unlike three decades ago, global crude prices are no longer a BoP (balance of payments) issue and not only because we also export refined stuff. Despite an unfavourable external environment now, forex reserves will remain comfortable, unless unreasonable exchange rate policies force them to dwindle. Short of prices shooting up to $300 a barrel, and OPEC no longer being the monopoly it once was, there is no BOP issue. Yet, there is a strategic reasons to diversify our sources of energy, because once global growth recovers, oil prices will climb again.

However, the boiling in oil mess is entirely domestic. First, we don't recognise that only the identified poor merit subsidies. If that's accepted, we will identify the poor and figure out more efficient methods of subsidisation, like direct cash income transfers.

Second, we won't believe in differential pricing for the same product. At least, we won't believe in it seriously, even if such principles are built into the PDS (public distribution system), because we recognise problems of leakage. Leakage and diversion aren't reduced even if petrol meant for the poor is coloured blue.

Third, wishing to subsidise the poor, but not knowing how to do this, we think we have a solution in subsidising specific products rather than specific individuals. So we have a perceived hierarchy of products through kerosene, LPG, CNG, diesel, petrol, aviation fuel. The lower down the hierarchy, the more the product is consumed by poor people. This is a doubtful proposition. To the extent diesel or CNG is used for transportation, it affects the poor too. Products are also substitutes, even if imperfect. Kerosene can be used to adulterate diesel or petrol. CNG vehicles can run on LPG cylinders. For that matter, subsidised kerosene can be smuggled across the border to Bangladesh. Since we haven't decided to subsidise only the poor, the vocal urban middle class, which masquerades on television channels as the common man/woman, will want subsidies on LPG. There is evidence from the 1990s to show the genuine poor have switched from firewood to LPG. Hence, everyone who uses LPG must be poor. Having decided some kind of product-wise subsidisation is warranted, even if stupid, we need to fix the extent of subsidy on specific products. And this is arbitrary.

... contd.

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