Despite series of fiscal and monetary measures and impressive growth witnessed in GDP growth at around 9%, the rate of growth of inflation continues to be unabated disturbing the political stability and confidence level in the economy. Although the major reason for this upsurge in inflation can be attributed to the unchecked spurt in oil prices at international level, the fact remains that the increase in oil prices and its repercussions on the domestic economy in general and on the inflation rate in particular have been experienced and were anticipated for quite sometime. Historical evidence clearly indicates that whenever there is an unusual increase in international prices, it is always accompanied by higher levels of growth in inflation rate. This correlation between oil price and inflation rate growth has been well established particularly in India during 1970s, 1990s and in 2007-2008. The severity of impact of inflation has perhaps not been felt so far this time, for the simple and very valid reason that the value of rupee had been appreciating due to (among other things) GDP growth achieved through liberalisation and globalisation of the economy.
It is time now to take a serious view of the ugly and piquant situation in which the Govt, economy and people are placed because of continuous increase observed in price levels of all commodities unresponsive to the counter measures in operation to check them and there being no hope of early return to normalcy or of stabilization of oil prices at an acceptable level. While we have limited options to contain international price levels definitely we can have some innovative measures other than the traditional fiscal and monetary counter measures already in force to soften the impact of present inflation. The present and steep hike affected by the government in the prices of petrol, diesel and LPG is likely to boomerang and worsen the situation further. Jugglery of figures and tinkering with the policies here and there cannot work any longer to overcome the situation and the reality has to be faced boldly without the confidence level being shaken. As a nation we have faced major crises worse than the present one, we have successfully tackled them and we have never failed. From this angle the following random thoughts emerge and perhaps can be given a trial after adequately evaluating the pros and cons.
The oil companies which bear the brunt of ever increasing prices of oil in international market without being in a position to pass on the same to the consumers because of inflationary impact and adverse consequences in the economy need to be compensated by all means to make them remain commercially viable. The loss incurred by them estimated at Rs. 2,45,000 crores need to be made good and for this, sources other than the hike in prices of petrol, diesel and LPG have to be found as increase in prices of these items have an inflationary impact there by affecting worst the economy in general and the common man in particular. Any policy particularly economic policy to be pursued, should be helpful to the common man. Other wise, it cannot sustain larger interest of the economy for long and may prove to be disastrous in the long run. The so-called common man, who has no hedge against any harmful effects of policy particularly such as the present one of pricing the fuels, can only suffer silently. He cannot be expected to be tolerant and patient for long as this may ultimately lead to economic, social and mental depression, which is certainly not good to any society by any reckoning.
There are umpteen ways to raise resources to make good the shortfall faced by the oil companies. The Government can cancel all subsidies and create an oil subsidy fund by inviting subscriptions and mobilizing resources from various sources to help the companies and also introduce some measures to benefit the companies directly.
The Oil Subsidy fund can be created by 1) earmarking a percentage through budgetary resources even at the cost of some fiscal deficit, 2) making state governments to share a small portion of the life tax levied from high end and luxury car owners), receiving contributions from cash rich companies particularly from those who are enjoying tax holidays; if necessary Government can consider giving further incentives on such subscriptions, 4) levying a small percentage on real estate transactions both on purchase and sale above a cut off limit say Rs. 5 cores and above, 5) levying a percentage on funds coming from abroad towards churches, temples, charitable trusts etc: under Foreign Contribution Act,6) inviting subscriptions from public without insisting on source of funds. This way a part of the black money can be expected to come to the main stream. Govt can pay a small percentage of interest on this money to attract subscription and make it repayable after a suitable period.
Some of the other possible ways to come to the rescue of oil companies can be 1) to make funds available to oil companies at very reasonable rates from the banking system, 2) facilitate oil companies to raise funds from abroad at competitive rates, 3) introducing special rates for diesel for vehicles utilized for public transport without giving room for irregularities and malpractices, 4) having special rates for high end vehicles used by corporates and high net worth individuals- if this cannot be monitored for practical reasons, such vehicle owners can be asked to pay a fixed amount per month to an escrow account maintained for the purpose and this fund can be shared by the oil companies based on their balance sheet size, 5) offering a special exchange rate as a special case to oil companies and insulating them from the adverse fluctuations of the exchange rate.
The above measures either in isolation or in combination can be attempted to come out of the present crisis. At any cost, the cost of production in an economy like ours has to be kept at the minimum which itself will help the inflation under check. The hike in oil prices has a chain and poisonous effect and cannot be easily reversed. Besides such a measure will only have a dampening effect on the morale of people particularly unemployed and people in the lower strata of society who have no means and hope to survive? It has to be accepted that rich will always thrive under any circumstances and poor will only perish under the present circumstances. One cannot equate a common man earning less than Rs.40 a day with an individual purchasing car worth Rs. few lakhs and crores. A civilised nation following the principles of Dharma cannot go in for measures, which can kill the spirit of living when alternate measures are available to overcome any crisis and kindle the light of Hope.
Views expressed are personal and are in the larger interests of The society and the Economy.
T V G Krishnan
