What the PPPuck! (Teach Me Some Economics, Please! – Part II)

 

We are truly a chest-thumping nation. Now they say India is the third largest economy! That is in terms of purchase power parity, which basically means comparing countries in terms of how much you have to spend for certain amount of everyday products in each country. So a dollar in India could be worth 10 dollars in the US.

There is this Big Mac index, which basically compares the cost of McDonald’s McChicken in different countries, in local currencies, and decides a country’s PPP by calculating how much McBurgers a country’s gross domestic product can buy. Strange. And we Indians, at least our media, which works 24x7 to boost stock market sentiments, get excited by such comparisons. We won’t allow the sheer number of people we have in the country to come into the picture.

They say it’s not required because we are comparing countries’ wealth, not that of people.

If that’s the case, then why PPP? Let’s go by real exchange rates. Let’s go by one’s affordability anywhere in the world.

And by the way, what if we calculate this PPP on the basis of the price of petrol?

Indians apparently pay much more for petrol than most countries in the world, in real currency conversion rates, not PPP, mind you.

Now, I drive a petrol car. When I see a newspaper that screams petrol prices are up by more than Rs 3 per litre and an advertisement of Jaguar XF Diesel S, an SUV costing about Rs 50 lakh, next to it, I just lose it. I’ll never understand why somebody driving a jaguar be offered subsidized fuel while users of two-wheelers and small cars, who account for most petrol consumption, pay through their noses.

What the PPPuck!

On the road I start seeing things. All those big SUVs going by were now laughing at me. They looked down sarcastically at the guy carrying all his 5-member family on a scooter. The world seems hostile and I feel a victim of injustice sitting in an air-conditioned car. Beggars and rikshaw pullers go out of the picture. It’s a world of diesel cars and petrol vehicles.

There were some suggestions of dual pricing for diesel, to limit subsidies to farmers, commodity transporters and perhaps public transport vehicles. But the finance minister has denied it and oil marketers have said it’s difficult to implement and anyway it’s not worth the pain because private vehicles account for just about 10-15% of total diesel consumption. Fair enough.

But the problem here is, petrol sales could well be less than diesel sale to private vehicles. And by artificially keeping diesel prices much less than petrol, the government is only encouraging people to shift to diesel vehicles. So petrol consumption falls and diesel sales rise. What’s the point? Why increase petrol prices so very often? After all petrol accounted for just about 3% (Rs 5,300 crore out of Rs 121,571 crore losses from oil sales) of the country’s total oil subsidy.

Also, apparently, it’s not that the government is subsidizing diesel, or jet fuel, which also by the way costs more than Rs 10 less than petrol in India, the only country where it happens. Fuel prices are so high because taxes are so high on them. In the case of petrol about 40% of its prices are taxes and duties.

So next time we talk about GST, or common tax rates for goods and services across the country, let’s talk making petrol and diesel, and perhaps jet fuel too, part of it.

Teach Me Some Economics, Please!

I would love to help realize the editor’s call for making our business newspaper accessible to as many people as possible, with simple and clear writing. But, often I don’t get the economics. (Psst! don't tell the editor.)
Economic theories are like god’s commandments. You can’t question them.
But I’m tired of renegotiating my home loan with the bank. It’s some eight years since I took the home loan. And I think they must have increased rates at least 15 times. They never cut benchmark rates. Instead they offer larger discounts to attract new borrowers. Existing customers can avail better discounts through renegotiation, which mostly involves a five-figure fee. I must have availed this five times. Some new guidelines I believe bar banks from offering higher discounts to new customers. So hopefully I will not have to renegotiate my loan rate again. You never know though.
The problem now is the loan rates are only going up. And prices of food and fuel are going up. The learnt tell us that increasing interest rates is the most effective way to stop increase in commodity prices. So when prices go up, the banking regulator prompts an increase in the interest rate of all kinds of loans. But how?
If you can’t afford a product, you can’t afford a loan to fund it too. This will make several buyers not to buy and then sellers will be sitting on a pile of products—they call it inventory—for which there are no buyers. This will force them to reduce prices.
The idea is simple. But it doesn’t seem to be working these days. Over the last 19 months, the Reserve Bank increased interest rates 12 times, yet the inflation rate—or, increase in prices of commodities in one year—is still high, at about 10%. Why?
My sense is that this theory is meant for things like houses, cars and televisions, not for basic and perishable products like food and vegetables. That’s because man can’t do without food, he can put off car and fridge for later.
So when demand for food is higher than supply of food and this pushes up prices, the only way to deal with it is to increase food availability. If you are reducing the demand, that may be through starvation of the poor!
The government should encourage farmers grow more food crops through incentives and cheaper loans. It has made loans costlier.
This has begun to impact production. This has begun to impact sales of cars, houses and garments, which are growing at a slower rate than before. So, food inflation is staying high, while industrial production is slowing.
Now, our government is trying to keep prices down but it wants to ensure overall economic and industrial growth stays intact. So, while increasing interest rates, it also allows companies to borrow more money from overseas at lower rates. This option is however not available for farmers.
So it seems making loans costlier is an extremely ineffective way to fight rising food prices. But then I don’t know much of economics. Many those who do, including our policy makers, apparently believe it is effective and they give a feeling that it’s a tried and tested method.
But I don’t get it. Can somebody help, please?