Tuesday, January 15, 2008

Fix the distortions, in petroleum products and in the rupee, at once

Two major price distortions in the economy, where the government is directly involved in setting prices, are with petroleum products and the exchange rate. While the deeper economic policy reform that is required is to shift both to genuine markets, without government involvement in price-setting, the minimum work that is needed right now is to reset the controlled prices so as to eliminate the pent-up distortions.

In Business Standard today, I argue that there are merits to tackling the distortions that have built up on both these markets at once; rough estimates suggest that the net effect on WPI of a 10% rupee appreciation plus a 10% rise in WPI fuel might cancel out in roughly 10 weeks.

On the subject of administered prices of petroleum products, also see this by Ila Patnaik from Nov 2007, and this article from The Economist.

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