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2008 July 04 Friday
India Energy Subsidies Run Up Government Debt

Subsidiies to keep down domestic energy and food prices are running on the government debt in India.

The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.

Botched Opportunities

Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill.

The Indian government can not sustain this foolish policy indefinitely.

The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year.

Socialistic policies are alive and well all over the globe. But India's government has chosen market interferences that are especially hard to sustain. Oil prices are set to go much higher. India's people will have a much harder time adjusting to higher energy prices when the government finally can't sustain subsidies and the prices inevitably rise to higher levels very rapidly. The rate of price rise will be even faster when the deregulation comes than it would have been had world market price changes had immediately translated into price changes in India.

With inflation over 11% in India the Indian government is restricting exports of a variety of products in order to keep down costs.

To contain inflation that has tripled in the past seven months, the government yesterday banned exports of corn after restricting overseas sales of food items including wheat, rice, cooking oils and pulses. India had earlier banned cement exports and imposed a tax on outgoing shipments of steel products.

These export bans only help in the short run since the resulting lower prices reduce incentives to increase productive capacity.

China suffers from similar distortions. But the Chinese government has a much larger pile of money to use to hold down internal energy prices. Also, the Chinese are letting some adjustments toward higher prices to take place.

Update: India is not alone with 10+% inflation.

Economists at investment bank Morgan Stanley found that about 50 nations show consumer prices up 10 percent or more from a year ago.

They warn that some central banks feel constrained, because they are focused on maintaining currency exchange rates against the US dollar. A weak dollar has caused loose monetary policy in nations with such "dollar-pegged" currencies.

These high inflation rates and the problem with oil production rates makes me think a global recession is inevitable in the next 2 years.

By Randall Parker    2008 July 04 03:19 PM Entry Permalink | Comments (3)
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