inflation, economy, interest rates

Nick-H

Oh dear, I'd better not take on the whole article,then but I think I grasp that quote.

Petrol is still quite a bit cheaper here than in UK, though I've lost touch: a few months ago someone told me it had reached £1.20 a litre --- about Rs.96. UK changed the taxes on fuel some years back to make diesel more expensive than petrol.

I had been vaguely thinking of going back to petrol. I have now scrapped that idea for the foreseeable... Even if it goes up, we still get the extra mileage.

I'm not against subsidy, and I'm not above taking advantage of it if it is there --- but I do fail to see why I and the rest of the car-owning public of India should have our private motoring subsidized!

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Just one member of the IndiaMike Mod Team

capt_mahajan

Because the conventional think in India has been that the poor use diesel (even indirectly, since produce is carried in trucks which run on diesel) and kerosene more and therefore a diesel hike hurts them more.

If that is true (and I am not qualified to say yes or no) then what stops them from selling diesel at petrol pumps at a unsubsidised price? The possibility that diesel will be diverted to these pumps instead of the 'poor'?

I don't know.

Nick-H

skk, bowing to your greater economic knowledge, but I'm afraid I'm not so sure.

Raising "the price of money" affects those that have to borrow it. Back in the mid 1970s, I did quite nicely out of inflation: I was employed, leading quite a cheap lifestyle, and getting considerable "cost-related" pay rises. For my parents, who had just retired on a fixed capital sum, and a fixed pension, it was a different story, they were, then, in the situation that I am in now.

India, though, Is not, or has not been, a big-spender society. It is a country where people will take out the smallest home loan they can, and pay it off as soon as they can. It is a culture where a new dress is bought because it is needed, not because it is pretty. Of course, a glance around a shopping centre like T Nagar shows that this is not true of all, but not many of those sari and jewel buyers there will be getting the credit card out; they will be paying cash --- and the increasing interest rates will be increasing their earnings. (assuming that they are earning, not just suffering the reducing value of their capital)

The model you quote does not apply to those who do not have to borrow to spend (other than indirectly; yes I recognise that capital is a factor of production, and that it costs more may increase a manufacturer's expenses).

Nick-H

Again, in UK, there is marine diesel, there is agricultural diesel, apart from road diesel --- they are died with different colours, and the farmer who gets caught with agricultural diesel in his expensive Rangerover will be prosecuted*. There is nothing to stop governments charging different rates of duty, or giving different rates of subsidy, for different usage.

I understand that 'branded' diesel isavailable at higher rates; but paying for the name on your fuel is the sort of thing that most Chennai-ites would just laugh at. Even the more-expensive 'premium' fuel is actually not recommended for my car by Maruti.

But diversion. Yes, it happens with ration-shop produce, so it would be surprising if it did not happen with fuels. Fuel selling seems to have many other scams associated with it.




* of course, these days, he fills up with old cooking oil from the local chip shop!

And I wonder if he realises yet, that his next Rangerover will be made by a company
owned by Tata, India?

trustindia

I'm no expert (does it show) but I think member Nick may have answered his own question

I've a feeling the thinking may hark back to an older more leftist India, where fuel was largely used for agriculture, transport and cooking (of course ther have always been private cars)
The recent explosion in private vehicles (as in 20 years)opens a whole new dimension to the idea of subsidised fuel that was not apparent all though years ago.

I've heard a charge levelled at Congress that their loath to be seen to be walking away from their socialist roots by changing this policy. I dunno if that's true but if it is, it's rather silly economics.

The tiered system Nick talks about in the UK would seem a good template but as is usual in India it's completely open to fraud.

What does the panel think?

The Indian government needs to think about this.

Nick-H

Yes, indeed. That is the why and wherefore of it --- the question I ask is why should it continue? I don't think it should, though I will scream as it is taken away from me.

A recent govt commission recommended regular small fuel price increases until the price is brought to that of the market price. It has been remarked that this is unlikely to be done just before an election.

I admire, buy the way, the way that electricity is subsidized (at least here in TN; I only have experience of paying elctricity bills in one state) --- the more your use, the more you pay per unit.

trustindia

Nick if you haven't read it

In Spite of the Gods : Edward Luce

Takes a different look at the role of subsidies in India.

edwardseco

Another way of looking at it is that in a soft state its a handy way of taxing by stealth, not that unwelcome to the government..

skk

Undoubtedly, there is an individual rate of inflation - its simply how much it cost to buy the stuff YOU buy this year, compared to what it cost to buy the same stuff last year; the individual level is the ultimate disaggregation of the overall country wide inflation but you see disaggregations like this in the UK with pensioner's inflation index, in India with rural and urban price indexes..

So, using the interest rate to control the amount of money will work differently in India, where the use of credit is so much lower - which is perhaps why that's what used exclusively in the USA but in India they use that and in addition also use a second technique - suppress the fractional lending side by requiring higher deposits from the member banks. So, no dispute there.

Its when thinking about how to control it that the macroeconomic stuff comes in - simply, just don't freakin' create extra money, either by controlling it directly, or by making it expensive to do so. Now, different people's mileage is going to vary and its difficult to point to which commodities or assets will reduce in price ( in India its perhaps been EQUITIES), which won't be affected, which will continue to go up as a result of this but in the aggregrate sense the general price level ( or all prices as a whole, so to speak ) won't go up, or won't go up as much, simply because if one category, say oil, continues to go up, by supply and demand pressures, then by holding the total amount of money constant, some other category HAS to come down.

Of course first you have to hold the total amount of money constant ( and reduce its additional creation at least) !

Amen to that ! Inflation is exactly that - a stealth tax - nasty nasty horrid people - truly, when I was in Philly last, as I passed the Federal Reserve Bank building, I kicked it, well the wall around it anyway. Ouch.. it hurt

-skk

capt_mahajan

Lying on my bookshelf.

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