Sunday, 27 January 2013

Sharing is Caring

Recently there has been a lot of hoo halla about the Government decision of increasing the prices of diesel in order to reduce the loss burden on the oil companies which they are carrying on their balance sheet. The problem is not only in increasing the oil price but also the shrinking income of the middle class due to recession who is going to phase this burden of increasing the price. Here when we discuss the diesel, we are discussing in contrast to the transport and its consumption by vehicles which consumes major part of the diesel.
 India can be divided into three parts

1) The rich part which represents 10-20% of the total population is not bother by the increase in the oil price because in any case they can purchase the oil at any price.

2) The lower income group which consist of around 10-30% is also not bother about increase in the oil price because these are the people who does not owns a car so does not require the diesel and are more concerned about three times meal (the myth that increasing the diesel will bring more inflation and thereby increasing the food prices is discussed below).

3) Then comes the middle class which consist of 40-60% of the Indian nationals, now the problem face by this segment is that most of them owns a car (because of easy instalment system by bank which allows most of them to be the owner of the car), now when they owns the car they need fuel to run their car and due to a wider gap between the price of petrol and diesel during the last two years most of them opted for a diesel car but now when the government is trying to remove the subsidy, the middle class is pinching the heat.

Yes there is news in the economy that increasing the diesel price will bring more inflation because trucks which is use to transport vegetables from one state to other runs on diesel and increasing the diesel price means increasing the vegetable prices because truck owners will ultimately shift the burden to the consumers, then there are trains and aviation industry who also consumes major part of the diesel but recently a report has been prepared which states that increasing the diesel price will not bring the Inflation rather it will bring down the inflation to 5-5.5%. Let’s see how
The report states that whenever government gives the subsidy to the public it will compensate the gap of the actual cost and the price at which the oil companies are forced to sell by providing money to the oil companies, suppose oil companies are purchasing the diesel at Rs50/litre but are providing to the consumer at Rs 40/litre, so the gap of Rs.10/litre is the subsidy which is to be borne by the Government. Now this has two impacts

1) Increasing the liability side of the balance sheets of the Oil companies because till the government does not pay it, these companies have to carry this burden on their balance sheets.

2) In order to pay this amount, government has to take loan from RBI, whenever Government takes the loan it affects the M3 (money concept) component, as it affects M3, it brings inflation in the economy, because of too much money in the market which is basically the loan we can say money tries to chase the limited commodity which there by increase the INFLATION, it’s been said if diesel price is increased and subsidy been removed then it will reduce the loan that Government has to take thereby reducing the Inflation and bringing it to moderate 5-5.5%.

Now let me give you some specific reasons why Diesel Prices should be increase

1) Main Function (responsibility) of the Government- it’s my point of view that Government should be more concerned about increasing the income side of the consumer rather than focusing on the expenditure, yes I know a balance has to be made and by saying not to bother about expenditure side I am not at all saying to let the Inflation increase but rather what I am trying to say is to open up the channels that will increase the income side of the consumer so that the consumer will not feel the heat of increasing the prices, we all know about the multiplier effects, increasing the diesel price and sharing it is the right step because it will help in bringing the fiscal deficit down there by improving the economic growth, increasing the confidence of the investor, once a step is taken it will accelerate the vehicle on which the Economy is travelling there by increasing the welfare for all.

2) Driving a Car is a choice- As I said it’s the middle class who is going to face the heat, but can’t we live our life without vehicles or reducing the dependency on them because Government is not forcing anyone to go and buy the diesel, it’s because we want to take the advantage of vehicles that’s why we want the prices the way we want, but why? If you want to take the facility you have to face the price because subsidy on diesel is bringing the economy down and Government simply can’t afford it. Moreover public transport has been provided by the government, we can take the advantage of that but I think we believe in travelling in our own vehicle because of ‘Assi jithe chavange gaddi modange’ advantage but we need to understand the seriousness of the problem.

3) Many other Solutions-There can be many solution to the problem of “how to reduce the Fiscal deficit” but I feel it’s better to take a big step instead of taking small and temporary steps because in any case people of India has to face the burden of increase in  prices that will be in favour of the economy.

4) Behaving like a small child-We all must have seen the crying of a child just before the doctor decide to give him an injection, I think Indian citizens are also going through that period, they just heard about the injection but are not concentrating on the kind of relief it’s going to provide in the long term, in any case injection (increase in oil price) has to be given before the health (economy) go out of control.

5)Time to contribute- I have a great respect for all the army people because these are the people who protect us from external enemies; I also want to do my part where I can say I have done something for the mother India, of course I can’t go on the border and fight because I know the best people are doing that but it’s also not the only way to protect INDIA, I think time has come to contribute towards the protecting our mother, trust me I am not a billionaire, millionaire, but just an ‘AAM AADMI’ but it makes me proud that I am contributing by sharing the burden that my economy is facing which is not less than fighting with the enemies.

We all need to do this, we all have to play our part, and it’s the simple thing if you have to take the facility you also have to pay the price, let’s all try to bring our economy out of this downturn and provide wheels so that economy can run with accelerated speed.
Keep on sharing, keep on growing, and keep on smiling