?The public have just voted us into power. We should not respond by raising the price of petrol and diesel??thus was the politicians? response in June to the government?s proposal to deregulate the price of petroleum products. ?The Maharashtra and Haryana elections are around the corner. It would be politically imprudent to tamper with the pricing mechanism at this juncture?. Such might be the political reaction were the newly constituted Parikh Committee to recommend that domestic prices be aligned to international prices. The quotes are of course my paraphrased version of corridor whispers but they do provide an insight into the dynamics of decision-making and in particular the dominant influence of the politician. Notwithstanding logic and evidence when economic push comes to political shove political perception seems always to trump economic fact. This is not unique to the petroleum sector. It is the case with all economic activities that have a mass impact.
I am not stating anything new. The skewed power equation between ?good economics? and perceived ?good politics? has been the subject of much commentary and discussion. This article could well be critiqued for flogging an oft-beaten donkey. I do so nonetheless because of concern at the growing economic costs of current political inaction. The enormity of these costs can be gauged from sectoral estimates.
First petroleum. It is well known that the oil marketing public sector companies ratcheted up losses in excess of Rs. 50,000 crore during FY 2008-09 because the government administered sales price of diesel, petrol, kerosene and LPG was less than the market-based costs of acquisition. Second Power: a just published report states that the opportunity cost of power outages, theft and captive generation is in excess of Rs 200,000 crore annually. And third infrastructure. McKinsey has written that if the current trends in inefficiency regards the development of infrastructure continue over the 11th and 12th plan periods (2008-2017), the country will suffer an opportunity cost loss equivalent to almost 18% of GDP in FY 2017.
The cost of shelving ?good economics? to pursue perceived ?good politics? is huge and increasing exponentially – so much so that sooner rather than later the price of such politics will become unaffordably high.
So the question: what if anything can be done to resurrect ?good economics?? The usual response has been ?nothing?. It is said that this is the price of democracy; that politicians cannot be expected to accept short-term pain in return for ill-defined future benefits. But in today?s connected world a different and more cautiously optimistic answer should perhaps be considered.
The current impasse between ?good economics? and ?good politics? is because of the politicians? perception of the reactions of the public. They expect a voter backlash to decisions such as for instance a hike in the price of diesel or the curtailment of free power. And accordingly they block the policy despite the supporting weight of economic logic. Ipso facto the impasse can be broken only if the politicians were persuaded that there would be no such backlash and that the public would welcome economic statesmanship over political populism. The fact is that public opinion is the politicians? lodestar. When that shifts, the politicians sway in sync.
Consumer preferences are not set in concrete. They alter in the face of new information and experience. The problem is that consumers are often ill-informed. The majority of the public do not know, for instance, the implications of governments policies on fuel pricing, subsidies, free power, etc. It is no wonder therefore that they react against suggestions that threaten to pinch their pocket. Were they better informed their responses to issues like a price hike might well be more muted.
The public does not respond simply to short-term issues. They are no doubt motivated by self-interest but this encompasses not just immediate needs but also the future . It is a mistake therefore to assume that consumers will always react adversely to decisions that inflict short-term pain. Governments have often used public opinion as an instrument of policy. At the height of the oil price crisis last year when prices were riding above $ 100/bl and subsidies were bleeding the exchequer, Malaysia for instance circulated a white paper on the broader consequence of continued subsidies on economic growth and development. The paper spelt out in clear, non-technical and objective language the ramifications on subsidies on infrastructure development, education, health, the environment, etc and made clear that its continuation would thwart growth. The purpose of the paper was not simply to prepare the public for a price hike but also to co-opt them in the government?s effort to bring around the political class. In similar vein it might be a good idea for the Parikh Committee to issue not simply a technical report but also a paper for the public.
?The author is chairman, Shell Group of Companies in India. These are his personal views
