Crude prices have been falling like nine pins. As per reports in media, crude price has touched six years low. This kind of fall has been unexpected and has taken many by surprise. For India, this fall has come as big relief. Crude is a major import item for India and has been a key contributor in ever burgeoning trade deficit.
Falling crude price means lower import bill for the country. Following international price fall, government has announced price cuts many times during last six months. There is a likelihood that we may very soon see a very steep price cut in both diesel as well as petrol price.
While government has cut price many times, the big question that needs to be asked is who has benefitted from this price cut. One of the major beneficiaries has been Indian middle class. Driving car and bike have become more enjoyable now and so has been the reckless use of petrol and diesel. A lower price generally makes consumers less careful about consumption.
Also wastage of product increases. Added to this is the increase in level of pollution assuming that the trend sustains. Price has already come down significantly for middle class and has also reduced their monthly expenses. They already have a sense of relief. Giving them more would be good but not desirable at this stage.
The second important beneficiary has been private and public mode of transport. These two entities are making merry as they have hardly passed benefits of price cut to end users. This is just opposite to what they do when the price goes up. Price of vegetables and other perishable commodities should have come down because of diesel price cut, but that has not been the case.
Even many state government transport agencies have not passed the benefit of price cut to travellers. On the other hand, gains made by these entities have been substantial. Some of them have reaped huge benefits.
The third beneficiary has been industry which uses diesel particularly for day to day needs. But they also have by and large retained profits with them. Ultimately only a small section of population has benefited from the price cut.
So does it make sense for the government to announce further price cut? Since there is a very limited trickledown effect it makes sense for the government not to cut the price further. Let the oil companies make profit from the fall in the price of crude.
When oil companies retain profit, they will make profit and it will be retained with these companies. Government is the real owner of most of these companies. No cut in crude price will mean that the bottom-line of these companies will go up and government will get higher dividend as profits soar.
This will help government retain benefit of price fall which can be used in other areas. Government can spend this saved money on issues such as healthcare and education. Selective distribution of price fall does not augur well for the complete society.
By: Vivek Sharma