'Petrol Prices Should Be Allowed To Rise': Economist Arvind Panagariya On PM Modi's Forex Appeal

"Petrol prices should be allowed to rise". This was top economist and Finance Commission of India Chairperson Dr Arvind Panagariya's prime advice to the central government as he backed the "price instrument" approach to deal with the oil shortage induced by the blockade of the Strait of Hormuz, a maritime chokepoint in the Middle East. He, however, praised Prime Minister Narendra Modi for his appeal to the nation to conserve foreign exchange reserves and oil, saying he was wise to bank on "moral suasion".

"Moral suasion is the first step. And the Prime Minister has wisely chosen to resort to it. And what comes ahead, we have to wait and watch. But I would rather that the shortages are dealt with through the price instrument, you know, allow the petrol price to rise," he told NDTV in an interview.

Calling the Prime Minister's appeal a good initial measure to help the nation tide over the potential crisis, he said he prefers the price instruments over what he called "blunt quantitative kind of restrictions".

"As an economist, I generally believe in the price instruments rather than blunt quantitative kind of restrictions, which bureaucracy seems to be more inclined on. So I hope we try to handle this using more of the price instruments rather than the, you know, blunt instruments like telling one set of workers to start working from home and another set of workers continuing to work at the workplace and all," he said.

PM Modi last week appealed to the people of the nation to conserve fuel by using public transport and car-pooling. He also asked the masses not to purchase gold for a year, to avoid unnecessary foreign travel and to adopt fuel-saving strategies like working from home.

To discourage gold purchases, the government has increased the import duty on gold from 6 per cent to 15 per cent.

Dr Panagariya On Gold Imports

Dr Panagariya said the same yardstick should be applied to the country's strategy on gold.

"Let the prices adjust. Even on gold, I would say that rather than going to tariffs as the instrument, let the exchange rate do it. Because the exchange rate is a much more generalised instrument. If the rupee depreciates, it discourages imports on all fronts, not just of gold. A tariff on gold actually picks one commodity, which is gold. But the problem is the balance of, you know, the current account balance," he said.

"Allow the rupee to depreciate a bit. That will make all imports more expensive and exports more profitable. And that will, on all fronts, try to bring the gap in the current account down faster. Minimum hurt on any specific sector," he added.

What He Said On US-Iran War

He said the US is also facing an oil shock.

"This shortage we are also facing in the United States. People generally think that, oh, the US has its own oil supplies, and therefore it is not impacted by the shortages. That's nonsense, because it's a global marketplace. And if prices rise abroad, the US supplies also go abroad. And that creates a shortage domestically. And that has reflected itself in a very steep rise, actually, in the oil price, in the gasoline price in the United States. Now the gasoline price has gone up from an average of about $4 per gallon to close to about $6 per gallon. So there's been almost a $2 hike over a $4 base. So that's almost 50% increase in the price. So it is something that other countries are also dealing with. Likewise, India will have to deal with it as well," he said.

The economist said the current political and economic situation in the US might force the country's government to bring the curtains down on the war in the Middle East.

"I think it's too early for us to get so alarmed. Because, you know, as an optimist, I think, you know, the United States is feeling the pinch of what is going on, the economic pinch of what is going on as much. And in the US, in fact, the midterm elections are going to be coming as well, all of which gives me a sense of optimism that the US will try to bring this war to an end," he said.