Differential Market Pricing and Rationing


The Indian Government has become innovative in hinting at some outlandish ideas in a prudish manner, and then going silent for a few days while the media goes mad, and then scrapping the ideas for good. I do not understand what is the purpose of doing this charade time and again.

I am referring to the intense discussion which followed after the Finance Minister acknowledged the possibility of (a) letting free market pricing operate for diesel ; and, (b) hinting at allowing a differential price at the pump for diesel cars (obviously a higher price) while letting the other users of diesel enjoy the subsidized price. Both ideas are non-starters: diesel is never going to be completely freed from subsidized price controls, it will fuel inflation of consumption items which are already very badly affected, and will also impact the prices of manufactured goods and commodities in the most negative manner. Industry will not allow this to happen, they will pressurise the government not to let this happen. The idea of differential pricing is a stupid idea, harking back to the days of the socialist form of government. This is exactly the idea which if implemented will create a black market for diesel, encouraging the subsidized users to illegally sell to the non-subsidized vehicle users of diesel. All these non-workable ideas should never be tabled and discussed in ministries or the parliament. The only fair idea is to remove all subsidies so that free market mechanism controls the end-user price. But that idea cannot work in India under the current circumstances of high inflation and moderating growth. Free Market Philosophies are not always good, as I have discussed in some of my earlier blog posts. We have seen the destruction of Western economies because of indiscriminate application of free market principles, the IMF prescriptions do not work and should be avoided by governments under serious economic troubles. I am not recommending adoption of old socialistic principles either. Governments need to think carefully and should avoid knee-jerk reactions or ideological solutions.

Without getting distracted into free market discussion, I would like to mention the very old idea of “rationing” here. The Indian Government came up with this brilliant idea of rationing gas cylinders to domestic consumers who depend on LPG cylinders for cooking. The government has proposed that they would try to limit the consumption of the cylinders to 4 cylinders per household per year. I don’t understand how government can prescribe our cooking habits and procedures ! Absolutely laughable !! No rationing will work, as people will buy from each other, and use illegal means to obtain more cylinders.

So, at the end of the day, all these ideas will not work and will not come to fruition. Government itself is rethinking. There is no immediate alternative to the subsidies that the government provides to the major oil marketing companies.

Government should encourage use of alternative fuels, such as CNG (Compressed Natural Gas) in all types of cars which has the attendant benefit of reducing pollution dramatically, and should provide subsidies to cars such as the Toyota Prius and the like. Where electricity is available in surplus form, we should encourage use of electric ovens rather than LPG gas cylinders at home for cooking. There must be many other really innovative ideas rather than the ones which have come up to the attention of our government.

Cheers,

Vijay Srinivasan
14th August 2011
Mumbai

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