Wednesday, November 05, 2014

Indian government or the RBI should create a "rainy day" fund which is used to shield the public from "spikes" in petroleum prices

The "spike" term has been purposely used as opposed to a longer "surge" [similar to electrical meanings]. Crude price is low these days [Nov'14] and the Indian government has recently deregulated the price of diesel. Suppose that petrol and diesel are currently selling at prices INR X and Y per liter, respectively. I think the Indian government should create a separate fund titled "Short Term Petroleum Price Shield Fund [STPPSF]". The current prices of petrol and diesel should be hiked by INR Z per liter each [e.g., sell at X+0.5 and Y+0.5] and the entire extra proceeds coming from the hike of INR Z should be put into the STPPSF. If at a point in the future the price of crude rises a lot for a short while, the funds parked in the STPPSF can be tapped to "shield" the public for a short while by temporarily providing a subsidy [thus giving people some time and a "ramp" to make a smooth transition to higher prices]. The funds in the STPPSF can be actively managed the way the NPS corpus is managed, to provide good and stable returns, while preserving the facility to withdraw funds at a short notice.

A few side notes. First, it needs to be ensured that a government can't tap into the STPPSF for political gains [near the elections, for example], perhaps by requiring the consent of India's Election Commission. Secondly, a committee can be convened at regular intervals to set the value of Z based on prevailing crude price and other factors [these factors and any formulas to be used can be worked out by experts]. Third, this method is essentially like a "provision" or a "contingency", a way to "shift" the burden of subsidy from time P [when crude is expected to be high] to time Q [when crude is low, as it is right now]. Z will assume a negative numerical value when the STPPSF is being utilized in order to provide temporary relief to the public. Fourth, in the event of an unexpected spike in crude prices, this fund will shield not only the public, but also the government - the government won't have to divert funds from elsewhere to provide a subsidy to the public.