There’s no case to subsidise fuel

High petrol prices could push users towards clean energy

T he Narendra Modi government made a politically brave and economically sound decision to raise petroleum prices in the country. The government seems to be in two minds about how to defend its decision. The Bharatiya Janata Party has been apologetic and blamed everything from the weather in the Caribbean to the Goods and Service Tax for the price hike. Minister KJ Alphons, on the other hand, defended it in class terms. There is no reason for New Delhi to be defensive. There are many arguments in favour of the decision.

The obvious one is that the government should not be subsidising fuel in the first place. The previous government tried to do that during the commodity spike that drove crude prices well over $ 100 a barrel. The net result of these and other government handouts was to divert funds away from sectors where the money could have been more usefully employed. Also, this outlay aggravated already high levels of domestic inflation and undermined the purpose of the subsidy in the first place. Subsidised prices also result in higher consumption. When fuel prices rise, consumption should naturally fall. If the price rise is masked, people are encouraged to burn more fuel and increase the amount of subsidy. Indians need to become used to the idea that pump prices rise and fall in tune with global trends. Indian fuel prices are admittedly artificially high because of layers of state and central taxes. The government uses petrol sales for revenue purposes. This is an inevitable result of so few Indians paying income tax. But there is also a positive consequence of such high taxes. Namely, it helps keep India on a low-carbon path of development and encourages a shift to renewables. The Modi government rightly takes the threat of climate change seriously and has deliberately tried to raise the cost of polluting fuels.

India has among the highest effective costs of carbon in the world. This inflicts a degree of economic pain on the population, but it needs to be understood that this is far outweighed by the existential damage that the country will suffer from higher temperatures. Somewhat like spending to maintain a military, spending a bit more every day to hold back climate change is about investing against a catastrophic future event. No one should begrudge this and the government should not be shy about explaining why petrol prices is in the national interest.