Tried to keep it as layman as possible. Suggestions are welcome.
Petrol is around ₹88 right? Suppose Modi goes all populist and waives off ₹30 from excise duty. So petrol now sells for ₹50. But what about that ₹30, where will be compensated from?
Taxpayers money. And other non tax revenue. Since taxpayers money is limited, and PSUs traditionally have not been so profit making, the ₹30 was borrowed from outside.
Consequently, Current Account Deficit rises by ₹30.
This is followed by an increase in fiscal deficit, which is nothing but government borrowings, of ₹30.
Now if the fiscal deficit is high, it will have following effects:
In future, the country will pay high interests on such borrowings which could have been used in infrastructure.
The public savings i.e., government’s savings is low, thus, supply of loanable funds is low and since supply<demand, interest rate rises (law of demand). Loans become expensive and so private investment is low. Indian companies can’t compete with foreign companies. This leads to point 3.
Since private investments are low, private companies are incompetent to provide us quality goods at cheap rate. (Micromax vs Vivo). This is how a part of fiscal deficit spills over to the external sector, resulting in increase in trade deficit. Trade deficit results in depreciation of rupee (currently around ₹71) making imports costly. Certain imports cannot be substituted with homegrown goods, and end product becomes costly. Inflation rises. And this spirals into a vicious circle.
Continuous high Fiscal Deficit will send bad investment signals to foreign investors. Why will someone invest in a country which cannot maintain its own finances?
They will withdraw their investments which will lower stock prices (NIFTY/SENSEX will fall). This will discourage investment and indices (NIFTY/SENSEX) will perpetually hover around lower levels.
As they will withdraw their investments, foreign exchange reserves will fall.
Not many people understand that Fiscal Deficit is the bane of a healthy economy. India currently pays ₹150k per second in debt repayments. [1] Just click on the link for a second and see the humongous debt we have to pay. We are paying it. Yes, we! It could have been used to build a school, an old age shelter, a hospital, a cold storage or hell even a sperm bank, but it’s all going into interest payments only because some great economist decided to give us freebies. If Modi goes on to do this the future generations will go on to face the burden. You want it? If yeah, than agitate.
Further, Rise in petrol prices will affect the demand of the complimentary good - vehicles. More people will now shift to electric vehicles, public transportation, and car pooling. This is a good thing considering the amount of air pollution, and noise pollution owning to the incessant honking by impatient Indian drivers. It’s a win win for us, eh?
Edit - Why didn’t the government reduce the prices when Brent hit $36? Because the government had to repay the amounts due on oil bonds taken by previous government, 2 lakh crore INR.
I’m not being a BJP spokesperson to justify the price hike, I’m being a concerned citizen to tell you why high fuel prices do us more good than harm, so long as inflation is under control. I cringed when Modi spoke about reducing oil prices and bringing exchange rates to ₹40/$. I’m averse to populism and you should be too, it’s good for the country.
Anirban Kar, studied at The Institute of Chartered Accountants of India
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