Tackling inflation and rising crude prices... economist way or political way?

Should the oil prices be hiked? Is the question, and by how much? is the important question. Oil is the lifeline of our industrial development. Power is what we call it. It rose to 135$ per barrel (158 lt), and now settled at 128$. Goldman Sachs predicts that by the end of the year it would at whopping heights, about 200$ per barrel, more than 50% increase.

It along with inflation is acting as a dirty spot on otherwise white garment of the UPA government, who would have highly wished this all to delay just by a single year. But this has hit them where it hits hard. Voters of our nation are blessed with a volatile memory, so this is exactly the time that makes impact on the upcoming elections. However, let's leave this political view point for a time being and look at the problem at hand.

The problem is quite clear, oil is a scarce resource, scientists kept on buzzing this all the time and we have realized it now. The prices of crude are rising and will probably continue with this one directional motion. Some sustainable steps are thus to taken to tackle this problem.

Government has taken several steps to curb inflation, increasing duties on exports acting as a disincentive for the steel manufacturing companies. Same is the case with rice and others cereals exports. This strategy however not seems to be working as inflation has touched 45 month high at 8.1%. The route taken by government has faced criticism even before the failure. The economists feel that this not a way of controlling inflation, it's just a way of delaying it. Moreover, it can badly affect the trade of the country. A famous saying comes into picture regarding this, "It takes years to make a costumer and only a single day to lose him". The nations that we are depriving of rice, steel etc, are our loyal customers and we are losing them.

However, there are many other things that economists don't feel. These are the things esoteric enough to be only understood by the elite class of politicians only. Elections are by the door, and if government is not able to curb (or for that matter delay) the inflation than it will effect adversely the elections. May be after that if the same party gets the opportunity to form the government, it can take some better methods which are time consuming but are more effective.

Now we come to the crude oil problem. There were many solutions suggested to tackle this problem. One is to increase the Petrol prices and not to tamper much with the diesel and LPG. The intention is quite clear, combat the rising deficit of the oil companies with the help of the petrol prices and also not act as deterrent in the growth of industry and agriculture. By keeping LPG costs about the same government wants to ensure that common man is not hurt by the hike in prices. The side benefits of this can also be thought of as drop in the number of vehicles on the roads decreasing pollution and traffic. However the problem with this is that the motor drivers can be more inclined to use cheap fuels or even diesel with even though more efficient than petrol are more polluting.

Another solution given is to apply geographic distribution to prices of oil. Metros etc, where the problem of traffic and pollution are alarming fuel prices should be more as the people using private vehicles can afford the increased price and the small cities and the villages along with for the industrial purposes fuel provided should be subsidized. When I read this solution for the first time, it appealed me the most. The problem however which was given was the in this kind of solution the black marketing, etc will be a big problem to control.

Now the solution which government is considering with utmost priority is to drop the duties and levies on the import of crude. It's worth mentioning here that fuel tax is the biggest contributor in the tax income of the government. This is a solution is certainly not sustainable. How long can the government substantiate the flow of fuel in the nation? The global prices of crude show no chance what so ever of tickling down. One problem with this solution which I feel is that the growth will keep its pace unaffected from the growth of fuel prices. Government would not be holding the pressure on it and one day all this load be over the general public all at once. This is the worst thing to happen. Rather slowly and steadily the effect of rising crude should passed on to the public, so that they adjust to the growing rates and set their spending according to that. Subsidizing petrol may seem to as providing the bird with the ample space to fly and then suddenly throwing him to the cage. But increasing the fuel prices to much high will be a suicide attempt by the government.

General public will only look the rising fuel prices; they won't be able to look deep into the matter that the crude prices are growing globally. That's why government would be looking for a politically best fitted solution rather than going for an economically bets solution.