The government’s decision to slash petrol and diesel prices has been welcomed by citizens, and will hopefully help rein in inflation across the board. The cut comes after significant declines in fuel prices in international markets (by around 9% in the last month) while the rupee has also made nominal gains of about 0.75% against the dollar over the past few weeks.
Middle class and lower-income people will be the most immediate beneficiaries of lower fuel prices, as they will significantly cut transport expenses. However, whether or not the lower cost of transportation will lead to lower food prices is a toss-up — we have seen retailers and transporters refuse to pass on the savings to consumers and instead focus on boosting their own bottom lines. But fuel price reductions alone do not fix the underlying structural problems in the economy that have allowed sky-high inflation to last for so long. Market manipulation by various players to keep retail prices high, despite declining input costs, regularly goes unpunished by the government. Meanwhile, failure to improve the tax system is also punishing the poor, as they are being squeezed by ever-increasing consumption taxes because of the government’s failure to introduce a true progressive tax system and follow the example of most of the rest of the world, where almost all food and essential items are tax-free to ensure that the poor are not subsidising the rich.
In the short run, the government needs to take a look at major players who are refusing to pass on savings and come up with a plan of action that appropriately punishes them, while also serving to discourage profiteering and other similar behaviour. Otherwise, the next few weeks and months will see a return to high inflation, as oil prices generally rise during the summer months, and our industry and retailers are almost certain to use them to justify further price increases, whether or not the numbers add up.
Published in The Express Tribune, May 17th, 2024.
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