Easy Economic Stimulus for India?

In India now. Not very impressed with Rs 52 per liter petrol when crude oil is trading at $40 a barrel.

A liter of petrol costs around Rs 52 in India right now. That translates to $4.06 a gallon. That's how much the US used to pay, back in July, when everyone was weeping about how unaffordable everything was. Right now, average cost of a gallon of gas is around $1.70 in the US. That is Rs 21 per liter (after taxes). When times were bad the US paid $4.10 per gallon, India paid $5.

Now, then, India is clearly a low income tax nation (i.e. there's very few rich blokes who pay their 33%). So, of course, the petrol tax must be a significant cash cow for the government. Reducing the petrol tax to zero, therefore, is not a tenable solution. And kicking it up to infinity also will kill tax revenues by asphyxiating demand. Clearly, there is a case for an optimum tax rate which shall yield maximum revenue to the government.

My expectation is that this "optimum" tax rate is probably not what is being levied right now. I believe that the petrol tax rate ought to go down - and that petrol ought to be available at a cheaper rate. Perhaps Rs 35 a liter or so. We're probably in the regime where lower tax rates equal larger revenues by stimulating demand.

Clearly, there shall be ecological repercussions. Indians consuming more shall emit more. And in a warming planet that would not be good news. But one must keep Shyam Sharan's words in mind while comparing Indian CO2 emissions with the emissions of the developed world. "Ours are survival emissions. Yours are lifestyle emissions". Worrying about Indians consuming a tad bid more when Americans (and the rest of the world) are hedonistically over-indulging is misplaced, stupid altruism. The bottom line is, India must consume more, emit more to raise its billion from poverty. Any reduction in emission must come from the developed world. Not India.

So, here's my suggestion to MMS and Chidambaram (and whoever else it may concern).

Cut fuel taxes. People will buy more cars. (Roads will get more congested - but that will result in greater and quicker infrastructure development and public transport use). More cars mean more demand. More manufacturing. More jobs. This will act like a stimulus which shall not be financed by a deficit. A win-win situation for all. (Even the environment as the resulting increase in demand shall increase fuel prices around the world a bit) - therefore increasing petrol prices in regions that use it inefficiently (the US basically).

Europe has a good incentive to keep prices low. They're plenty rich anyway and they need to curb their per-capita emissions. India can afford to keep it cheap. We're desparately, miserably poor. We need to emit more to develop more. Cut fuel prices now!