Here is an interesting story from “The Economist”: Drive now, pay later .

Those of you who know me probably know I am a bit of an India buff, so things about South Asia tend to catch my eye. But I thought this might be an interesting topic in the context of whether “free trade” is always good.

Unlike the US where we are not shielded from market forces when it comes to oil, India subsidizes its fuel so that consumers don’t feel the heat too much. Although India has done lots of things to reform its economy to make it more amenable to capitalism, it retains many government programs that recall its past Marxist leanings. One of these is its heavy control over its fuel programs, and it appears that while this program may be helping consumers, India’s budget and its economy are likely to take quite a hit from rising oil prices.

One interesting issue raised in this piece is the question of who really benefits from subsidies, in this case fuel subsidies. While we would all like to pay less at the pump, I question the wisdom of these subsidies. I somehow doubt that the poor in India benefit a whole lot from this because they largely do not drive or use petroleum products including fuels. They get around on foot, in bicycles, and occasionally by train (Indian Railways is also a government controlled entity). They are unlikely to benefit as much as “middle class” and upper class consumers and industries that use oil a whole lot more.

Also, it may not be helpful to shield consumers from these costs when it simply adds a tremendous burden on the public purse, but it unlikely that India or other governments similarly situated for that matter will renounce fuel subsidies because it may cost certain politicians their jobs come election day.

Submitted by,

Gurudev (Dave) Allin