Calcutta Notebook


Global prices of oil have declined from US Dollar 103 per barrel in August last year to Dollar 53 presently. Correspondingly, the price of petrol at the outlet has declined from about Rs 75 a liter to about Rs 63 a liter in Delhi today; and falling. The Central Government has passed the decline in price to the consumer. On the other hand the Kejriwal Government of Delhi has increased taxes on oil. Lower prices of oil as implemented by the Modi Government will lead to increase in consumption while higher prices as implemented by Kejriwal will lead to lower consumption. The question is whether the country should increase consumption of oil or reduce the same.

Low price of oil has many negative impacts. It hits at the economic sovereignty. It encourages people to burn more oil which, in turn, forces the government to import yet higher quantities of coal, oil and uranium. In truth India is sinking into the quicksand of ever increasing consumption, and increasing imports. Also, low price of oil makes the economy more energy-intensive. Businessmen use diesel fuel based generators to produce goods. Then economy becomes dependent upon oil. One cannot do without oil in event of a war or a natural catastrophe like tsunami and that will inflict great damage on the economy. Dependence on imported oil weakens India's ability to withstand global political pressures. For example, India would have to make nuclear deal with America; and succumb to the pressures from the Arab states in a situation of war if consumption of oil was high. Lower price of oil prevents the development of alternate sources of energy. This correspondentĀ  had an opportunity to study the working of Gobar Gas plants in Village Shyampur near Haridwar some time ago. Till mid-nineties about 50 Gobar Gas plants were in operation successfully for more than twenty years. Then LPG Gas Cylinders became available at low price. Farmers found it easier to cook food with LPG than with Gobar Gas. They closed the gobar gas plants. This alternate source of energy was dismantled because cheaper LPG became available. The same applies to other sources of energy such as wind, solar, micro-hydel, and thorium. Cheap oil distracts attention from developing these indigenous sources and traps the nation into remaining dependent on imports. The cost of solar power at present is about Rs 8 per KwH. This source is not being tapped because the price of oil is less. In consequence people continue to burn imported oil and neglect indigenous sources. The choice before the country, therefore, is whether to use the decline in price of crude oil to increase consumption or to protect the economic sovereignty. Needless to say, economic sovereignty should be putĀ  before consumption.

In fact, an increase in price of oil is not sufficient. Other measures of reducing consumption should be considered along with. Many countries have law that requires a car owner to have at least one co-passenger while driving on the highways. 'You can be fined if you are driving alone'. Car owners are thus forced to pay for the services of a dummy passenger who simply sits in the car. This raises the cost of driving own car to the office and makes it economic to use public transport. This law also encourages people to make car pools. There are agencies that specialize in making car pools. They match car owners with passengers.

It is argued that low price of oil is good for India because it reduces the cost of production of goods and helps Indian Industry become globally competitive. This is true. Businessmen tell that the cost of electricity in China is about Rs 2-3 per unit for commercial establishments against Rs 5-6 in India. Industries like aluminum smelting arnd steel mills are heavy consumers of energy. Indian products such as these will be priced out of the global market. So the government is caught between the devil and the deep blue sea. Reduction of energy consumption requires that its price be raised. But this prices India out of the global market and threatens economic survival. On the other hand, lower prices of oil lead to increased consumption of energy and hits at the economic sovereignty.

The solution is to partially withdraw from globalization. One may impose high import duty on imports and provide export subsidy to exports. Say, the cost of production of a T-shirt in India increases from Rs 40 to Rs 50 due to higher price of energy. The sale price in the world market remains at Rs 40 because energy is available cheap in China. The Indian Government can impose an additional 25 percent import duty to face this situation. The cost of an imported T-shirt will then increase to Rs 50 in the Indian market and make it possible for domestic producers to compete with imported goods made from cheap energy. Similarly, the Government can provide a subsidy of Rs 10 to Indian manufacturers on exports of T-shirts. They will then be able to sell at Rs 40 at the prevailing global rates despite paying high price for energy. In this manner one can maintain a high energy price scenario in the domestic economy while remaining competitive in the global markets. Just as a farmer builds a small mud wall to retain the rain water in his field, similarly one can build a small import barrier to maintain high energy prices in the domestic market. Of course, this may require the government to rewrite rules of the WTO. And that is a tall order!

Indeed, the logical result of globalization is that every country will have to follow the harmful practices of the most irresponsible and decadent country. The country that sells its natural resources at a throw away prices; or the country that pays low and exploitative wages to its workers; or the country that destroys its rivers for the generation of electricity will have lowest cost of production and win in the global markets. Other countries will have to per-force follow the same harmful and exploitative practices if they have to remain competitive in the global market. Therefore, all countries are today engaged in a race to the bottom.

Vol. 48, No. 24, Dec 20 - 26, 2015