Direct and Indirect Costs of the US Financial Crisis

Deepankar Basu

The global financial crisis that started with the bursting of the housing bubble in the U.S. in 2007 imposed both direct and indirect costs on the working and middle class populations. The direct costs are those associated with the bail-out of financial institutions, which will ultimately be borne by the taxpayers; the indirect costs are those associated with the ensuing economic crisis and the deep and prolonged recession that came in its wake, which, again, will be mostly borne by the working class population. While both costs lead to increasing deficits, and over time accumulating debt, of the federal government, they are of vastly unequal magnitudes. The direct cost (i.e., the costs associated with bailing out the financial institutions immediately after the crisis) is much smaller than the indirect cost (i.e., the cost, in terms of rising unemployment and government deficit if one considers the latter a cost, arising due to the recession); the contribution of the bail-out funds to the build-up of sovereign debt, in the US (and Europe), is minuscule compared to the contribution of the indirect cost (the widening gap between tax receipts and government outlays caused by the recession).

Many people on the left, by emphasizing the cost of bailing out financial institutions (and its contribution to sovereign debt build-up), target the wrong, and smaller, costs. There are two senses in which targeting the bail out funds is incorrect. First, the magnitude of those costs are small compared to the indirect costs. Second, if the direct costs had not been incurred, i.e., if the system continued to be organized around capitalist lines and the financial system had not been bailed out, the ensuing recession would have been deeper and hence the indirect costs, ultimately borne by the working and middle class people, even higher.

It is important to be clear that the workings of the financial sector under capitalism imposes enormous costs on the working and middle class people not only because it needs to be bailed out when the system hits the fan, as happened in 2008. The financial sector imposes much larger costs by the sheer magnitude of the externality of its actions on the working class, by the structural refusal to internalize the costs of its speculative activities, by increasing the financial fragility of the system when the bubble is inflating and ushering in the deep and prolonged recession that inevitably arrives when the bubble bursts. The direct cost of bailing out the financial system when the crisis breaks out is small compared to the indirect cost that comes from the externality of its casino-like activities. In fact, if the financial system had not been bailed out, the indirect costs would have been even higher because the recession would have almost certainly turned into a depression (of the magnitude that the world witnessed during the 1930s).

FIGURE 1: Time series plot of changes in the index of house prices in major US cities


Let us study the US economy and try to understand the difference between the direct and indirect costs of the financial crisis of 2008-09. Recall that the the housing bubble in the US started deflating from around late 2006 (Figure 1). The securitization process that had built itself on the shaky foundations of the housing bubble started unraveling within a year, and the financial crisis broke out in real earnest in 2008. The financial system went into panic, credit markets froze (as banks stopped lending to each other and to nonfinancial firms) and this sent shock-waves through the US government and the Federal Reserve circles. Monetary policy had already kicked in at least an year ago, with the Fed slashing short term interest rates and making liquidity available to the financial system (see Figure 2). But this was clearly not enough.

FIGURE 2: Short term interest rates in the US


To unfreeze credit markets and deal with the growing panic, the US Treasury department adopted the Troubled Assets Relief Program (TARP) in early October 2008. The conceptualization of the TARP went through two rounds. In the first round, the US Treasury argued that the TARP should buy out the toxic assets (i.e., assets that drew its value from the housing market like mortgage backed securities, the collateraized debt obligations, etc., and were now more or less worthless) from financial institutions to restore confidence in the financial markets and prevent widespread bankruptcies. Very soon it became clear that this strategy would not work because it was impossible to ascertain the “true” value of the toxic assets. In other words, it was not clear at what price the assets should be bought for by the US Treasury. Hence, this strategy was abandoned and in the second round of iteration, TARP was conceptualized as a recapitalization program. This entailed lending money (or other liquid assets like Treasury bills) to financial institutions but in return taking ownership shares of those institutions.

The bail out of the financial institutions that we now talk about is precisely TARP as a method to recapitalize financial institutions, in particular banks, credit market institutions, the automobile industry and the insurance giant AIG, by injecting fresh capital into their balance sheets in lieu of ownership shares. How much money was involved? Initially, TARP was thought to involve $700 billion. But, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the maximum authorization for the TARP from $700 billion to $475 billion. The TARP ended on October 3, 2010 and had by then disbursed only a total of $411 billion. Of this, 77%, i.e., $318 billion, has already been recovered through repayments, dividends, interest and other income earnings of the US Treasury.

In fact, the part of TARP funds that was lent to banks has already been recovered with a profit: a total of $245 billion was invested in banks, and it has been recovered with a profit of about $20 billion. It is estimated that the overall cost of TARP, after all recoveries are taken into account, will amount to $70 billion, only about a tenth of the original amount of $700 billion. Hence, it is clear that the overall contribution of the TARP (the bailing-out of the financial system) to the deficit (and outstanding debt) of the US government is not large. The direct cost of the financial crisis, in terms of the funds required to bail out the financial system during the peak of the crisis, is not very large when compared to the indirect cost, to which we now turn.

FIGURE 3: Civilian Unemployment Rate in the US

(Source: Federal Reserve Bank of St Louis,

The indirect cost arose because of the magnification of the effects of a downturn into a deep and prolonged recession, the magnification being caused by the fragility of the financial system. Unemployment rates went through the roof and continues to be at historically high levels despite the official end of the recession in the second quarter of 2009; the labour force participation rates have fallen due to discouraged unemployed workers dropping out of the labour force; the median duration of unemployment has increased to extremely high levels; the share of long term unemployed workers has grown to postwar highs (see Figure 3 and 4 for some details).

FIGURE 4: Civilian Participation Rate in the US

(Source: Federal Reserve Bank of St Louis,

While it might be difficult to accurately quantify these losses, it seems clear that they are far higher than the $70 loss that the taxpayer will be saddled with due to the bail out of the financial sector. For instance, some studies suggest that about 7 million workers have been displaced from long-term employment during the Great Recession, only a subset of all workers who have been adversely hit by job losses. These 7 million workers will experience an income loss of about $774 billion over the next 25 years.

In a similar vein, the contribution of the direct investment from TARP to the growth of the fiscal deficit is small compared to the contribution due to the recession. Figure 5 plots the net outlays (i.e., net of interest payments of its debt) of the federal government, the receipts of the federal government and the difference between the two for the period 2006-2011. It can be seen from Figure 5 that the major jump in the deficit occurred between 2007 and 2009, a period during which it increased by about $1252 billion. This increase was the result of an increase in net outlays (i.e., expenditure) by about $788 billion and a fall in receipts of around $463 billion. Even assuming that the total $411 billion disbursed by the US Treasury for the TARP had occurred during that period (which it clearly did not), it is only about a third of the increase of the federal deficit during that period. Thus, close to (or more than) two-thirds of the increase in the federal government deficit was the result of non-bail out costs.

FIGURE 5: Deficit of the US Federal Government

(Source: Federal Reserve Bank of St Louis,

Looking at the plots of the outlays and receipts of the US federal government in Figure 5, we clearly see that the two series have diverged significantly since the start of the Great Recession. Even though net outlays (i.e., expenditures) have flattened out since 2010, receipts (i.e., tax revenues) have not picked up in any major way. Thus, the gap between the two continues to be big, in excess of $1000 billion every year. This huge gap is what lies behind the deficit and mounting debt of the US government, not the $70 billion that will be the net cost of the TARP. It is more or less certain that a similar account would be accurate for Europe also, i.e., the largest portion of the debt of Eurozone governments would be the result of indirect costs and not the direct cost of bailing out the financial sector during the crisis of 2008.


To conclude, let me summarize the argument. It is important to distinguish between the direct costs (i.e., bail out of the financial sector through the TARP) and indirect costs (rise in unemployment and the growth of the government debt due to the deep and prolonged recession) of the financial crisis and focus on the second rather than the first. This is because the second is much larger in magnitude than the first. In fact, it is not even clear that the first can be considered a cost because without bailing out the financial sector via recapitalization (or temporary and partial nationalization), the recession would certainly have been deeper, increasing the burden on the working people. In addition, concentrating on the second cost allows us to focus on the systemic aspect of the costs that the financial sector, in its speculative avatar, imposes on the working and middle class population of a country. This forces us to conceptualize an alternative that is likewise systemic in nature and goes beyond arguing against bail out of financial sector firms.

Deepankar Basu is an Assistant Professor in the Department of Economics, University of Massachusetts.

Andrew Kliman on “The Failure of Capitalist Production”

The Failure of Capitalist Production: Underlying Causes of the Great Recession
by Andrew Kliman,
Pluto Press

The recent financial crisis and Great Recession have been analysed endlessly in the mainstream and academia, but this is the first book to conclude, on the basis of in-depth analyses of official US data, that Marx’s crisis theory can explain these events.

Marx believed that the rate of profit has a tendency to fall, leading to economic crises and recessions. Many economists, Marxists among them, have dismissed this theory out of hand, but Andrew Kliman’s careful data analysis shows that the rate of profit did indeed decline after the post-World War II boom and that free-market policies failed to reverse the decline. The fall in profitability led to sluggish investment and economic growth, mounting debt problems, desperate attempts of governments to fight these problems by piling up even more debt – and ultimately to the Great Recession.

Kliman’s conclusion is simple but shocking: short of socialist transformation, the only way to escape the ‘new normal’ of a stagnant, crisis-prone economy is to restore profitability through full-scale destruction of existing wealth, something not seen since the Depression of the 1930s.

About The Author

Andrew Kliman is Professor of Economics at Pace University, New York. He is the author of Reclaiming Marx’s ‘Capital’: A Refutation of the Myth of Inconsistency and many writings on crisis theory, value theory and other topics.

Industrialisation and forms of struggle: Or, should industrialisation be opposed?

Raju J Das

Industrialisation is understood narrowly in the sense of manufacturing and broadly in the sense of the application of modern science and technology to the transformation of raw materials from nature. It is necessary for national development, as the economist Gavin Kitching and others argued decades ago. Industrialisation adds value to unprocessed goods extracted from nature and thus increases society’s income. Often owners of land – peasants – do not earn more – or do not earn much more — than those who work in industry as wage labourers. Industrialisation makes possible the production of a vast range of goods, which are directly used by people: clothes, materials required to build houses, traditional and western medicines, consumer durables, cultural items such as books and music instruments; the different types food that go through the manufacturing process, and so on. And, industry indeed produces the means of production necessary in both farming and industry itself. Industrialisation holds out the possibility of ending want and material suffering. It provides employment to the increasing population, including through forward and backward linkages. It makes it possible to reap scale economies and specialisation in ways not possible in agriculture. In part because of the above, industrialisation increases labour productivity, one of the fundamental indicators of progress, prosperity, and economic development in the society at large. Industrialisation breaks the mutual isolation of producers: this happens as they now work in great numbers in large cities and towns. Their geographical concentration will potentially allow them to fight for justice and equality in society, both on their behalf and on behalf of other oppressed groups. Industrialisation, connected as it is to science, promotes a culture of rational thinking and can potentially undermine the basis for superstitious and obscurantist ideas and practices. Given these and many other advantages of industrialisation, the Left – at least the Marxist left — cannot be opposed to industrialisation (although sections of the postmodern/populist Left are, as industrialisation is seen by them as a sign/carrier of modernity that supposedly destroys an authentic pre-modern culture). The question is: what form of industrialisation should the Left endorse in theory and practice? What happens when, for example, a proposed SEZ (special economic zone) displaces thousands of peasants? Should industrialisation be endorsed under this situation?

To answer this question, one may start with agriculture. Land is the most important means of production in agriculture, at least at the current stage when farming is relatively less capital-intensive. Fertility of land is a product of natural forces as well as human investments. It is normally the case that human investments in land to raise land fertility happen closer to existing centres of population and commerce than away from these. Fertile tracts of land therefore are generally located closer to existing centres of population and commerce. Now, owners of industry need also land. But their need for land is different. They need to locate their factories on: land is not used as an input in the way it is used in farming. And in a market economy, they need land in a specific location: industry tends to be located closer to existing centres of population and commerce for the reason that greater profits are made possible by greater geographical accessibility. Therefore, the fight over industrialisation often becomes a fight between owners of industry and owners of land (including peasants). This fight is over not just an absolute piece of land but over its location.

To be able to understand the on-going struggles over industrialisation, we have to carefully distinguish between industrialisation per se which is necessary in all modern societies from its various historically specific forms, and we need to also distinguish between various forms of struggle over industrialisation.
There is a strong logic to locating industry on the land which is not currently cultivated or irregularly cultivated, in relatively less accessible locations and away from the locations of fertile land on which peasants are currently dependent on or which may soon be used. Why? Firstly, as mentioned above, industry does not need fertile land as an input. Location of a factory on or close to a fertile land destroys natural fertility of soil which is almost impossible to manufacture in industry. It is indeed a great social cost to use a fertile land for industrialisation which does not need it. Secondly, forcing the industry to locate in these areas (e.g. relatively less accessible areas, away from fertile land) will result in the development of new means of transportation and communication (which will also create jobs). Industrialisation in these less accessible locations will also give an impetus to agriculture. It is unfortunate that when industries could be located in more remote locations on land that is relatively less fertile, they are being located on currently cultivated fertile land. This must be fought against. This is one form of struggle over industrialisation.

If, however, a fertile land currently being cultivated must absolutely be used for an SEZ — and whether this must be the case should be democratically decided and not decided by business — several conditions must be laid out. The value of the land as a compensation to the family must be determined in relation to what the value of the land would be after the industries have come up. Under no circumstances must the living standards of the families losing the land and the families losing access to employment on that land (farm labourers, tenants) be allowed to be worse than what they were before the change in the use of the land. Indeed, because industrialisation will make possible greater production of wealth and because this is possible only by displacing the people who currently occupy the land and depend on its use, it must be an absolute precondition of displacement that their material and cultural needs (adequate food, clothes, shelter, education, health care, etc.) are satisfied (including by giving employment to at least a single person from every affected family with a living wage in the industry) and that environmental sustainability of the place and nearby-places is maintained. Investment must be made in the lives of the people who are affected before the investment is made in the SEZ itself. This will not happen automatically. This requires democratically mobilised struggle. This is the second form of struggle over industrialisation.

Peasants as peasants have been involved in heroic battles over dispossession from their land – in Bengal, in northern Orissa, in Maharashtra, and so many other places. This is not the decisive battle against the industrialist class (domestic or foreign), however. The decisive battle against it cannot be, and will not be, fought by peasants as property owners against dispossession, although local and temporary success is possible. The battle against unjust dispossession can only be successfully fought by urban workers in an alliance with peasants and rural workers. Note also that the issue of peasants being separated from land is not a single separable visible act of a group of industrialists, backed by the state. Given, for example, the high costs of farm inputs which come from the industry and given the decreasing prices of farm products from which industry benefits, millions are going into debt, and to clear their debt, peasants are selling their land. Many are leasing their land to better-off farmers, including those who enter into contract with industrialists, domestic and foreign, to produce farm products for industrial processing. There is therefore a potential site of struggle against this insidious form of dispossession from land. The industrialists who set up an SEZ by displacing peasants from land and the industrialists who benefit from high prices of goods sold to peasants which contribute to their economic unviability and separation from land are both members of the same family. The fight against high prices of industrial goods used by peasants is therefore an important part of the fight for a particular form of industrialisation, one that would seek to remove the differences between peasants and industry and the relations of oppression between them.

There is still another form of struggle over industrialisation. Peasants turned into the proletariat in the SEZs, in newly industrialising areas – whether located on fertile land, displacing peasants or in remote locations — will and must fight against the monied class, initially for better wages and working conditions. One may respond by saying that the SEZ framework of industrialisation does not allow for the working class organisation. But then who said that the SEZ must be a necessary form of industrialisation? Or if it does, who said that an SEZ – understood as an industrial cluster — must be one where workers are to be alienated from their democratic right to organise? If business has the right to make money, then surely, and in the interest of democracy, workers have the right to organise to demand a decent life? This is the fourth form of struggle over industrialisation, the struggle that connects workers of different industrial clusters and cities politically and that demands that industrialisation must be of a particular form such that those who do the work must be fully able to meet their social and cultural needs. An SEZ, an industrial project is not based on a one-time act of separating people from their land and livelihood. Much rather, the particular form of industrialisation that is in question is based on a continuous separation: separation of people from the product of their labour, from their blood and sweat. It represents endless money-making at one pole and limitless misery at another. This form of industrialisation does not just produce things that are of potential use. It reproduces an invisible relation of separation of masses from their lives, a relation between them and those who control their lives at work (and outside). So because separation of people from their land creates a ground for the second form of separation, the struggle against the former must be connected to the struggle over the latter, and can only be fully successful if it is connected that way.

Protecting the peasants does not necessarily mean protecting the peasant property. If industrialisation can better the conditions of peasants (i.e. outside of farming), perhaps ‘sacrificing’ their property to make room for industrialisation can be favourably considered. Everyone must be provided with an opportunity to live a life with dignity. Whether it is in industry or farming should, ordinarily, be beside the matter. But there is an ‘if’, as in ‘If industrialisation can better conditions of life of peasants…’. Industrialisation, whether led by state-capital or private capital has not done much for millions of peasants. And it won’t unless it is a site of contestation.

The current struggles around SEZs and displacement appear to be a little narrow. They are often too defensive. The message of these struggles seems to be: ‘don’t take away our land, leave us alone (to our misery)’. The struggle against displacement should be a part of larger family of struggles, i.e. struggles over industrialisation as such. This is because the objects of struggle are objectively inter-connected. The fight against SEZs must be a fight against a particular existing form of industrialisation which leads to double dispossession: political acts of dispossession or primitive accumulation and dispossession through market mechanisms (rising prices of industrial goods leading to debt). A part of the fight should also be within SEZs (and other industrialised areas). Seen in another way, the fight against SEZs and displacement is a fight for a certain form of industrialisation, which, in turn, is a fight for (deepening) democracy and for the satisfaction of social, cultural and ecological needs of those who are displaced to make room for industries, those who lose land because of rising prices of industrial goods, and those who work inside the industrial areas.

Raju J Das is an Associate Professor at York University, Toronto, Canada. Email:

Maruti-Suzuki: The Realpolitik of Managerial Intransigence

Ankit Mandal

Can the Maruti management’s stubbornness be explained only by its unwillingness to allow workers to have their union? This seems doubtful. Unions in India in themselves do not pose such a grave threat for managements. There must be something more to it.

Rather, it reflects a bourgeois resoluteness to bring the long pending demand for institutionalisation of the changes in the labour regime to the centre-stage of policymaking. Changes in the labour regime – casualisation and contractualisation that neoliberalism intensified have not yet been codified completely, which frequently puts managements in legal predicaments, allowing unions to pose ‘legitimate’ demands. A recent Supreme Court judgement which ordered regularisation of contract labourers employed in airports demonstrates the lag between the industrial reality and the legal framework.

In the past decade, the agenda of labour reforms could not be pushed ahead partly because of political compulsions (UPA I was supported by the left parties) and partly due to economic conundrum (the global crisis) in which the UPA regimes found themselves in.

The Maruti management’s determination is not coming from its own competitive need; rather it is representing the general will of the bourgeoisie in India. Not anyone could have acted in this manner. The central role of the automobile sector in the present phase of capitalist development and Maruti’s overwhelming leadership in this particular sector puts it at the helm of the bourgeois class.

At least, it is hard to deny that this sector has been in the forefront of demanding labour reforms. The recent statements from the Automobile Component Manufacturers Association of India (ACMAI) and the Society of Indian Automobiles Manufacturers (SIAM) testify this. These associations have been emphasising that labour reforms are crucial for the growth in the automotive industry.

Society of Indian Automobile Manufacturers (SIAM) Ex-President Pawan Goenka : “Labour reforms is high on agenda of SIAM for quite some years. We don’t have any policy on laying-off during slowdown. …We have made several presentations to the Ministry of Heavy Industries, but no serious discussion has happened yet on what could be done… One thing is certain that something has to happen. Otherwise, it will have serious impact on the sector.”

“The rigidity in labour laws has led companies to increasingly resort to outsourcing and contracting of labour. To be very precise, the need of the hour is flexible labour reforms,” General Motors India vice president P Balendran had said.

SIAM Director General Vishnu Mathur said the law should give “flexibility” on taking disciplinary actions even against a single person.

“We believe that employment will get a boost by labour reforms which is the need at the moment,” Srivats Ram, president, Automotive Component Manufacturers Association of India (ACMA) told.

The Haryana government is clearly backing the Maruti management and is not at all showing any sympathy to the workers. Haryana Labour Minister Shiv Charan Lal Sharma says, “How can it be possible for the management to take back workers against whom an FIR has been lodged and (criminal) cases have been filed”. Haryana Labour Commissioner Satwanti Ahlawat says, “During the talks, it came to notice that there is a clear intention of few persons, backed by some political support, who want to mislead workers,”.

However, even if tomorrow the Maruti management agrees to workers’ demands in toto (which is doubtful), it has achieved what it had to – it has already succeeded in bringing the state in for labour reforms. The central government has (Sep 21) agreed to set up a National Automotive Board as a nodal agency for the issues relating to this industry within 2-3 months, and that “Labour laws or in fact any law is not sacrosanct or permanent. Labour laws will have to change with time. If the industry feels so, the Labour Ministry will look into it.”

Financialization, Household Credit and Economic Slowdown in the U.S.

Deepankar Basu

Between 1948 and 1973, real GDP for the U.S. (measured in 2005 chained dollars) economy grew at a compound annual average rate of about 3:98 percent per annum; between 1973 and 2010, the corresponding growth rate was only 2:72 per cent per annum. While the 25 year period of high growth after the Second World War has, with some justification, earned the epithet of the “Golden Age” of capitalism, the period of relative stagnation since the mid-1970s has been characterized by heterodox economists as a neoliberal capitalist regime (Dum´enil and L´evy, 2004, 2011; Harvey, 2005; Kotz, 2009).

Three characteristics of neoliberal capitalism have attracted lot of scholarly attention. First is the marked trend towards growing financialization of the economy, by which is meant a growing weight of financial activities in the aggregate economy. Figure 1 presents some well-known evidence, for the period 1961-2010, in support of this claim. The top left panel plots the share of value added that is contributed by the FIRE (finance, insurance and real estate) sector in the value added by the total private sector of the U.S. economy: between 1961 and 2008, the contribution of the FIRE sector increased steadily from about 16 per cent to roughly 25 percent. The top right panel gives the share of financial sector profit in total domestic profit income in the U.S. economy, which shows a steady increase since the early 1970s (interrupted briefly in the early 1980s). It is only during the financial crisis in 2007-2008 that this share declined for a brief period; it is noteworthy that the share started a rapid ascent in 2009, and has recovered much of its loss since then. The two figures in the bottom panel provide evidence, for the period 1988-2009, of the growing size of the stock market: both stock market capitalization and total value traded, as a proportion of nominal GDP, has trended up since the late 1980s, providing clear evidence of the growth of financial relative to real activity.

The second notable characteristic of the neoliberal regime has been the veritable explosion of the flow of credit (and the build-up of the stock of debt) in the economy. One important dimension of the growth of credit has been the unprecedented increase in the credit flowing to (working class) households. Figure 2 presents evidence in support of both these claims by plotting the time series of outstanding debt (measured as total credit market liabilities) of three crucial sector of the U.S. economy: the nonfinancial business sector, the household sector, and financial business sector. While the business sectors display an increasing trend since the early 1960s (along with large fluctuations at business cycle frequencies), the household sector debt starts a secular rise since the early 1980s (with almost no business cycle fluctuations), and the financial business sector also displays a secular rise till the onset of the Great Recession. The last chart in Figure 2 plots the time series of the ratio of outstanding household debt and outstanding debt of the nonfinancial business sector. The ratio shows a clear upward trend since the mid-1970s, with household debt increasing from about 85 percent of nonfinancial business debt in the mid-1970s to about 140 percent just prior to the start of the Great Recession.

The third important characteristic of neoliberal capitalism has been stagnation of real wages for the bulk of the working class. In the face of rising productivity, this has entailed a massive redistribution of income away from working class households, leading to widening income and wealth inequality. Figure 3 presents evidence in support of this claim. The top panel plots an index of productivity (measured real output per hour) in the total nonfarm business sector of the U.S. economy. There is an increasing trend in productivity over time, with a marked acceleration in growth since the mid-1990s. This is in sharp contrast to the evolution of real wages of production and nonsupervisory workers plotted in the bottom panel, who comprise about 80 percent of the U.S. workforce. The hourly real wage has barely increased between the early 1970s and the late 2000s; the weekly real wage has in fact declined during this period.

The main question that this paper wishes to explore is the possible connections between the slowdown in economic growth on the one hand and the three characteristics of neoliberal capitalism on the other? Heterodox economists have been interested in this question for at least the last three decades, and the main contribution of this paper is to extend that literature by presenting a theoretical model to address this question. Building on and extending Foley (1982, 1986a), this paper develops a discrete-time Marxian circuit of capital model to analyze the link between financialization, nonproduction credit and economic growth. It is demonstrated that increasing financialization and the growth of household credit (a component of nonproduction credit) can reduce the growth rate of a capitalist economy. Hence, this paper offers a novel explanation, rooted in a Marxian circuit of capital macroeconomic analysis, for the slowdown of the U.S. economy during the neoliberal era.

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Higher Education Cuts, Students Protests and Media Misrepresentation

Bulent Gokay
Farzana Shain

At the end of 2010, tens of thousands of university students have demonstrated in central London and all over university campuses in the UK, against the coalition government’s proposals to raise tuition fees up to 9,000 pounds. Government and Media coverage of the protests has focussed primarily on two factors – the violence of a minority of protestors and the apparent ‘privileged’ profile of a few student protestors. ‘Rich rioting students’ was just one of the headlines describing the demonstrations. A panellist on BBC’s Question Time described protestors as ‘just a bunch of middle class students’. Michael Gove, the Education Minister, defending the planned increase in tuition fees posed the question: ‘Is it fair to ask a miner to subsidise the education of someone who can go and become a millionaire?’ The irony of this analogy can surely not be lost on those who remember how brutally Gove’s Conservative Party, in its previous incarnation, destroyed the heart of British working class mining communities.

Courtesy: LATimes

One of the most passionate, but misguided, commentaries on the recent student protests comes from Julie Burchill (the Independent, 16 December), who made a plea to the public to ‘spare us these pampered protesters who riot in defence of their privilege’. Focusing on one student, Charlie Gilmour, who has been singled out by almost all the British media because of his connection to a famous rock star, Burchill vents her anger at so called ‘middle class’ protestors at the same time as dismissing university education as a wasteful time of ‘boozing and bullshitting funded by the taxes of people who had the actual gumption to remove themselves from the playpen of education and get a job as soon as legally possible’. She goes on to suggest that for many working class youth, university education has made little difference to their prospects of getting a job.

Courtesy: LATimes

Burchill is right to question the success of government-sponsored schemes such as widening participation which critics argue has done little to equalise educational outcomes. All the research suggests that while working class students are more likely to attend university than they did 10 years ago the class gap has not necessarily diminished. Working class students are more likely to attend newer universities, to be part-time students and to study for more vocational subjects. But to dismiss university education for the masses as completely irrelevant is surely wrong. Burchill is also wrong to dismiss the current protests as entirely middle class-led. The fact that some students from middle and upper class families join the student protest does not make the whole student protest an action of the privileged few in defence of their privileges. University students, whatever social class their parents are from, historically tend to act together as ‘students’, and for most part for progressive causes as in the case of the 1968 student protests. At first in 1968 too, the governments and media also sought to portray the student protests as work of radical students and small groups of middle class troublemakers.

The protests over the last few weeks have seen large numbers of working class students (some of them school students) protesting because it is they who have the most to lose from the proposed public spending cuts. Further, to get so hung up on the notion of a so-called middle class-led protest serves to support Gove’s and the coalition government’s attempts to create an ideological standpoint, presumably on the side of the ordinary working people, from which position to launch a wholesale attack on all the social and economic achievements of the previous generations, like the universal child benefit, housing benefit, disability benefits and similar other measures.

The current representation of the protestors as middle class serves a deeply ideological and manipulative function of deflecting attention away from the stark realities of the public cuts and their real causes. Many people who oppose the cuts simultaneously accept the argument that there is no alternative but to sacrifice education and other public services in order to save the economy. Further, a large section of the British public and media appear to have accepted the line presented by the government that the total package of cuts worth £128 billion by 2015-16 was ‘unavoidable’ because of previous administration’s careless spending, and almost self-made huge deficits. Until the financial crash of 2008, however, the Labour governments had succeeded in keeping national debt below the 40 percent of GDP target that they set themselves. In 2006/07, public sector net debt was 36.0 percent of the GDP. In 2008, it rose rapidly primarily because of ‘financial interventions’ to bailout of Northern Rock, RBS and other banks, because of lower tax receipts, and because of higher spending on unemployment benefits, all caused by the global recession. The current deficit was caused primarily by the recession not by previous administration’s pre-crash careless spending. It currently stands as 63.7 percent of National GDP, and was projected to peak at 74.9 percent in 2014-15.

Massive cuts to the NHS, local government, and education budgets are not the inevitable solution to national debt. During the Second World War, the UK national debt reached much higher figures of up to 150 percent of the GDP. It is not uncommon for countries to borrow more during the time of serious national and international crises, like wars, or economic upheavals like the one currently affecting the world, and to pay back the debt over a period of time once the economy starts to grow again. In this sense, budget deficits can be an effective way to deal with shocks such as wars, financial crashes and deep recessions. If anything, the problem of low economic activity is the real, and more urgent, issue than the fiscal stability.

Courtesy: LATimes

David Cameron’s ‘Big Society’ programme offers an ideological justification for the massive public spending cuts which are about much more than just deficit reduction. The pretence of ‘there is no alternative’ offers a means for the Conservative project to radically transform the state and to transfer more services and money from the public to the private sector. If the real intention was to take the British economy out of the crisis, then such massive cuts would not be the answer. There are alternatives: we need to find a fair and sustainable path out of crisis. Budget deficits will more or less automatically heal with the economic recovery. Trying to cut the deficit quickly, in the midst of a serious recession, will damage the economy and extend the crisis. The government instead should concentrate on growth and allow growth to reduce the deficit. Cuts will not reduce the deficit, investment will. Recently, the Confederation of British Industry (CBI) announced that it expects economic growth in 2011 to be much slower than previously predicted. A much weaker consumer spending, resulting from massive unemployment and lower wages in 2011, is described as the main reason for this. Cutting too far and too fast will mean more people out of work, fewer jobs in the economy, lower level of taxation from workers and businesses, and more people on unemployment benefit, which will cost the government more. The real challenge is to introduce constructive ways to restructure the national economy so that it can deliver strong and consistent growth.

The current crisis and the way some other parts of the world economy have been dealing with it successfully, and all social and cultural legacies of this turbulent process have highlighted, like never before, the crucial role of education. The financial and economic crisis has had a particularly strong impact on young people with low levels of education. Investments in education pay large and rising dividends for individuals, but also for economies. On average, a young person with a university degree will generate £77,000 more in income taxes and social contributions over his/her working life than someone with a high-school degree only. Even after taking the cost of university education into account, the net public return from an investment in tertiary education is £56 000 for a male, in generated income taxes and social contributions over his working life. Enhancing tertiary education attainment can therefore help governments increase their fiscal revenues, making it easier to boost their social spending, in areas like, for example education. As the global demand for jobs shifts up the skills ladder, it has become crucial for countries to develop policies that encourage the acquisition and efficient use of these skills to retain both high value jobs and highly skilled labour. Burchill is right to suggest that ‘clever working class youth of this country [have] been socially and spiritually ‘kettled’ – hemmed in, suffocated and stifled’ historically by ‘the privilege and entitlement’ of the likes of elite. But does the answer really lie in cutting away higher education for working class students altogether?

Britain’s total investment in higher education, even before the current cuts of the Coalition government, was 1.3 percent of the GDP which is behind the OECD average of 1.5 percent. Despite the student numbers rising by approximately 25 percent in the last 15 years, the UK has slipped from third to fifteenth position in numbers graduating among industrial countries because investment in higher education has risen much rapidly elsewhere. Within Europe, the UK is already falling behind France, Denmark, Finland, Sweden, Portugal and Netherlands, among others. Other Western governments, most notably the United States and Germany, have viewed the global financial and economic crisis as a sign not to retrench but to invest in their higher education systems as a necessary part of investing in the skills that will be needed for recovery in near future. In the UK, however, it was education that was first in line for cuts in spending: the cutting of the Future Jobs Fund, the cancellation of school building and refurbishment, the abolition of the Education Maintenance Allowance, and now funding cuts in university teaching budgets, fewer university places and a massive increase in university tuition fees. All these draconian measures will ensure that talented people from working class backgrounds will not achieve their full potential. The poorer you are the more scared you are by the prospect of tens of thousands of pounds of debt. It seems this is exactly what the Coalition government wants- to keep education for the rich and privileged. And this is what tens of thousands of students are protesting against. If we want British economy to recover and take its place in a much more competitive world, if we want Britain to be ‘open for business’, we should make higher education available for everyone, regardless of their social class. The more skilled people we have, the more likely companies will be willing to invest in the UK.

Bulent Gokay is a Professor of International Relations, Keele University and Farzana Shain is a Senior Lecturer, Keele University

Public Expenditure: the Affordability Fallacy

John Weeks

Implicit almost all discussion of public expenditure and revenue, most virulently in the debate over deficit reduction, is the fallacy of public affordability. This fallacy is manifested, for example, in the argument in the United Kingdom that if university education is available to a large portion of the population, the public sector cannot afford to deliver it without substantial fees, even less to provide support grants to all students.

Because “the public sector cannot afford” to provide university education, it is necessary to ration the public contribution on the basis of need (income or means testing). The same argument is applied in very major area of social expenditure: with an ageing population, “the public sector cannot afford” to pay more than a safety net pension; cannot afford to provide all the drugs and care needed by that ageing population, and so on.

“Affordability” arguments are fallacious. The fallacy is obvious once one considers it from the level of society as a whole. Consider the example of funding of university education. Only a tiny minority of people would argue that primary education should be a matter for individual families to decide and wholly fund themselves. This near-consensus results from the conviction that children have a right to be educated, and that a democratic society requires an educated and informed public. These convictions, not finances, determine the provision of primary education by the public sector: for everyone, regardless of income or status, and if some wish to contract for private education, they may do so. The social consensus on public provision of secondary education is equally broad (for everyone), but number of years provided varies (lower in Britain than most developed countries). Only a few on the far right wing would argue that the pubic sector “cannot afford” to provide primary and secondary education for all, though in practice many right of centre attempt to minimize the expenditure and therefore the quality of provision.

The same principle applies to university education: what is the appropriate coverage and to what level? Here there is no consensus, and those who believe that people have no right to higher education avoid taking that potentially damning position by seeking cover under the affordability argument: “I wish we could provide everyone with a university education, but we cannot afford it. In any case, people gain personally from higher education, so they should pay for it themselves to the extent that they can. The public sector can only afford to help the poor, and if you are poor and clever you will find funding.”

This line of argument is the most superficial mendacity, and would apply equally to primary and secondary education (see my previous comment). The true essence of the affordability of higher education argument is, “People have no right to higher education. If they want it, let them pay for it. If you are poor and clever you might go to university. If you are dumb and rich you certainly will.”

When there is a social consensus that people have a right to a university education if they want one, then reducing public expenditure and raising fees does not save society money. There are two affects: 1) for those with high incomes it shifts expenditure from the public sector to households, and 2) for those on low incomes it reduces provision. It “saves public money” in the same sense that not filling potholes is a financial gain.

Most pernicious is the application of the affordability fallacy to pensions and health. Two core values of democratic societies are that children have a right to education and the old have a right to live their final years in decent conditions with dignity. Given this consensus on the elderly, discussing financial affordability is grotesque. The question is, in light of a country’s economic development and productive resources, what level of decency can and should society provide to everyone past a certain age? Once the level is decided, it merely remains to decide the institutional mechanism by which it will be funded. Considerable empirical evidence indicates that provision of pensions through the public sector has the lowest resource cost. This is primarily because unlike private insurers, the public sector need charge no risk premium. Its revenue is guaranteed, and the growth of that revenue is determined by the growth of the economy as a whole.

Even more obvious is the fallacy of the affordability argument for health care. It is an appalling manifestation of the power of capital in US society that there seems to be no consensus that everyone has a right to be healthy, a principle Franklin Roosevelt included in his “Economic Bill of Rights” speech in January 1944, that every American had “the right to adequate medical care and the opportunity to achieve and enjoy good health”. In almost every other developed country this principle is accepted. When it is accepted, as with education and pensions, the issue is not financial affordability, nor is it coverage (everyone qualifies). The only issue is the level of society’s obligation to itself on health care.

The affordability argument perpetuates a profoundly anti-social and anti-democratic fallacy. Whoever makes it asserts (as Margaret Thatcher did) that there is no society and no obligation to fellow human beings beyond an absolute minimum that the residual of social decency forces upon even the most reactionary Thatcherite or Reaganite. Reducing that residual of social decency is the project of the affordability fallacy. Existence is viewed as a collection of isolated individuals, for whom one has no concern, even if, or especially if, for those whose lives are rendered nasty, brutish and short.

On “The Crisis of Neoliberalism”

An interview with Gerard Dumenil on his new book (coauthored with Dominique Levy) The Crisis of Neoliberalism (Harvard University Press, 2011). Courtesy: The Real News

Part I

Part II

Misery is Relative / Comparison of Minimum Wages in Delhi and London

GurgaonWorkersNews no.28 (July 2010)

The following text is devalued with increasing speed: the global crisis and subsequent struggles shake the global wage scale. In June 2010 the Indian government ‘free-floated’ the petrol and diesel prices, fueling the already double-digit inflation. In the UK the government increased the VAT by 20 per cent and cut wage-subsidising benefits. The collapsing Euro inflates the Rupee. The struggles in China and Bangladesh put pressure on wages in the global low-income zones. We will see whether class struggle and crisis will re-shape the global wage-division, old concepts like ‘workers’ aristocracy’ and most of the concepts of ‘integrated’ working-classes ‘in the imperialist nations’ will help little to understand. We need global proletarian debates.

The following ‘relative’ comparison of Delhi and London minimum wages and their respective purchasing power would be a rather tedious endeavor if seen as a purely statistical enterprise or poverty competition. It would result in the usual ‘statistical findings’, e.g. that if you are inclined to become a well-groomed truck-driver with a passion for cheap daily newspapers and road-side cups of tea you should move to Delhi; whereas for any other reasons you should make it to or stay in London – if you can – because you will earn roughly four and a half times as much in terms of purchasing power. If you were a textile company manager looking for low wage zones your perspective might be a little more blunt. You would compare the absolute wage difference between a potential minimum wage worker in London’s East End (around 1,200 GBP per month) and those of a worker in Delhi’s Okhla industrial zone (around 76 GBP per month). The fact that in absolute terms the London wages are about sixteen times higher will make investment decisions a fair bit easier.

We compare the workers’ wages to consumer goods and services. This in itself will tell us little about the actual social position we find ourselves in once we depend on this wage and have to sell our labour power for it. How does our wage compare to the income of people in the city around us? Will we feel ‘excluded’ from wider social life and life-styles? How does the wage compare to the general ‘productive social wealth’, the material power to set in motion bodies and minds for profitable purposes or mass destruction? We compare wages which are set by two different states, wages which are defined as ‘minimum’ in terms of the local, moral, historic minimum level of reproduction for a worker. One local context is the capital of an ‘ex-colony’, the capital of a developing country, the regional centre of an emerging global industrial cluster. The other local context is the capital of an ‘ex-empire’, the centre of historical Industrial Revolution, with 250 years of industrial working class history. The centre of world finance, real estate bubbles and a declining manufacturing base. This also means that Delhi area is dominated by a work-force which – in general sense – knows how many acres of wheat you can reap in a certain amount of time or how many shirts or metal parts a worker can produce per day. Productive workers from mainly rural backgrounds have a rough notion how their productivity relates to wages they receive and prices they have to pay. London is characterised by mainly ‘unproductive labour’: a cleaner might know how much money their company charge the client, they know about exploitation on an immediate level, but less on a social scale.

Workers’ wages and their consumption level tell us something about the ‘stage of capitalist development’, if we agree that one of the characteristic outcomes of industrial working class struggle is that after the class wars of mining, railway building and machine and weapon manufacturing workers a following generation of workers is able to buy ‘industrial goods’ in form of long-lived consumption goods like radios, fridges or washing machines. We also have to mention the ‘sources’ of our consumer products. In Delhi we refer to the most common trade-form for basic food items, vegetables or durable consumer goods: small traders. The prices in London are based on prices of large super-market chains for daily goods and internet price comparisons for durables – because this is how proletarians shop in general. We leave it to a different research to find out whether the demise of small traders and the consequent drop of general wage level due to increased competition will be compensated by ‘cheaper’ large-scale and ‘more direct’ trading.

When we compare London-Delhi wages relative to food items, the London wages are about five to six times higher, if we compare them in relation to the mentioned ‘durable consumer articles’, London wages are fifteen times higher. The astonishing fact is the relative ‘expensiveness’ of agricultural goods’ in India, compared to ‘basic manufactured items’: While I can buy five times as much rice of my London minimum wage, I can ‘only’ buy three times as many shirts or shoes. This is only partly due to higher relative petrol prices in India, which form a decent chunk of food prices. Apart from room rents – which are a peculiar issue – it is personal services such as cooked food or hair cuts where a minimum wage in Delhi can command as much personal service labour as the wage in London. This tells something about the low levels of service proletarian wages in the Indian metropolis! Out of good attitude we put ‘global goods’ into the equation, e.g. Nescafe, Mc Chicken, Nokia mobile phones or IPods. We can see that the ‘wage division’ widens when it comes to these ‘global goods’ – which doesn’t mean that the Delhi young proletarian would not have access to the ‘use value’ of these goods. Let’s not argue about the use value of a McChicken, but of Chinese Fake-Brand MP3-Players or Handy-Cams. Apart from the ‘old school’ consumer durables like fans, gas-cookers and bicycles, the modern proletarian in Delhi owns a mobile phone with gadgets. We suggest the thorough article on Sanhati: “Do 600 Million Cellphones Make India a Rich Country”

But let’s stick to the basics: the level of minimum wage as means of reproduction for a worker. Behind this phrase a political field of question opens up. In London the nominal/direct wage does not cover reproduction, in the sense that in case of illness, unemployment, old age the state has to guarantee an additional part of income. The London minimum wage is hardly a ‘family wage’: the state has to top up in terms of child benefits etc. In Delhi these ‘welfare provisions’ only exist on paper, in 90 per cent of cases workers won’t get unemployment or pension money, neither health care. For most workers in Delhi the minimum wage has to cover parts of these future or ‘accidental’ costs. In a purely economical sense we would have to add these monetary benefits or service costs to the London minimum wage. On the other hand a London worker is very likely to be ‘fully proletarianised’ in the sense that s/he hasn’t got a ‘second home’ in a village and no access to – however small – a piece of land and wider family network which could act as a basic security net. We can argue whether it is not the other way around – that the urban wage has to finance the maintenance of the small piece of land and the rural family members. Fact is that many workers in Delhi industrial areas try to save money – first of all on rent – in order to be able to ‘save money for the home’. Ideally a ‘single worker’ – who is either unmarried or whose family lives in the vilage’ will try to save half of his or her monthly wage. The most common life perspective – or illusion – is that the urban industrial wage work is a temporary stage and that there is a future as semi-peasant / shop-keeper etc. in the village.

When it comes to rent and living arrangements the ‘village’ plays a role. In London only ‘migrants’ would stay five people to a room, no separate kitchen – which is the norm in Delhi, not only for families, but also for unrelated young workers. In this way they can drop the rent share of their total wage to under 10 per cent. In London you might rent a room in a shared flat, giving you access to a kitchen and a toilet, which will cost you around 50 per cent of your wage. In the relative wage comparison we took all three different scenarios into account: comparing the most common set-up; comparing ‘a single worker’ to ‘a single room’ according to the respective local ‘workers’ housing standards’; comparing ‘a single worker’ to ‘a single room’ according to London housing standards. The main obvious result is that compared to other ‘goods’ rent in London is relatively high and the main reason for why the relative wage levels are ‘only’ four to five times higher. Who would have thought?! At this point the quantitative state of mind leaves us clueless: Is it expression of a higher living standard to live in a London Stratford bed-sit, while your two-weeks dead neighbour starts to send his whiffs through the mortar?

What about the ability of workers in Delhi and London not only to be a categorial part of global working class formation, but to take part in it in a physical and communicative way. We can compare costs for flights Delhi-London and costs for an hour spent on the internet and we can see that a flight belongs to the ‘fridge/washing machine’-category out of reach for most Delhi workers, while the internet is closer to home. Here again, we reach other forms of exclusion. Even if a worker in Delhi would be able to save money for the flight, that does not mean that s/he will get a visa. Even if a worker in Delhi can surf on the net, the fact that the Hindi sites are still rather insular compared to the ‘global electronic village’ of the the English speaking Indian upper-class is not an ‘economical’ problem. Which does not mean that the worker in Delhi would not have the means for ‘political mass-expressions’, see prices for printing a small newspaper or for sending it by post. On a similar relative price level range the products of ‘knowledge circulation cum mental domestication’ such as daily newspapers or cinema. In terms of access to career paths to leave the minimum wage misery it looks rather bleak for proletarians on both sides of the globe. A truck driving license might be within reach, but won’t solve the initial problem. The worker in Delhi would have to save around 833 years in order to afford the two years fees for a MBA (management degree), while the worker in London might make it in 20 years. Great.

How do these wages relate to themselves in the historical dimension, does the gap close or widen over time? Difficult question. We can assume that since it’s introduction in 1997 the relative minimum wage in the UK fell – which was 3.60 GBP at the time. But did it increase in Delhi? Minimum wage in Delhi 1990 was around 900 Rs. The early 1990s were turbulent times in terms of inflation, up to 18 per cent annual consumer price increase in 1994 to 1996. If we assume an average annual inflation of around 8 per cent for 1990 to 2010 period, the wage of 900 Rs would have had to increase to 4,177 Rs by 2010 to compensate. Here the fundaments of statistics become drift-sand. Since 1990 the share of temporary and casual jobs, the amount of jobs through contractors increased rapidly, while more and more permanent workers lost their jobs. May be the minimum wage has increased in real terms, the general conditions of industrial workers in Delhi have hardly improved. In what kind of ‘working class position’ would a London minimum wage be situated in Delhi? If we take a common commodity basket (rent, food, clothes, transport, consumer goods – according to average share of total wage), we come to a medium wage ratio of 4.5 times higher wages in London. This would mean that the ‘equivalent’ to the London wage in terms of purchasing power would be around 23,400 Rs per month in Delhi. What kind of wage workers in Delhi would earn this kind of wage – which would place them into widely hailed ‘emerging Indian middle-class’? Some call centre workers earn that kind of money. Permanent workers in the automobile industry earn this much, partly more. We can see that major wage differences run within the industrial areas of Delhi as much as within the global working class. We can also see that the ‘wage question’ is everything but an ‘economical question’, but – in the end – a question of social-historical power, of class power. Let’s stop calculating!

But whoever wants to know how we calculated things: We could see a rather shaky exchange rate between Rupee and British Pound during 2009 – 2010. At the end of November 2009 the rate was 1 GBP / 78 Rs. Since then the British Pound steadily declined in value – or rather, the Rupee got appreciated. On 3rd of May 2010 the rate was 1 GBP / 68 Rs. For the total wage calculation we take the minimum wage for industrial helpers in Delhi May 2010 of 5,200 Rs per month based on an 8-hours day and a 6-days working week. We have to emphasise that only a fraction of workers actually get this wage, most workers earn less or have to work considerably longer hours for it. We base the London hourly minimum wage of 5,80 Pounds on the same monthly working times.

Monthly Minimum Wage Delhi: 5,200 Rs / 76.5 GBP
Monthly Minimum Wage London: 81,600 Rs / 1,200 GBP
Exchange Rate 3rd of May 2010: 68 Rs / 1 GBP

Item [Kilo Rice]: Price Rs in Delhi [22 Rs] / Price GBP in London [1.10] – Amount of Items I can buy with monthly wage in Delhi [236] / London [1091] (London Wage this times higher/lower than Delhi Wage [4.6])


Kilo Rice: 22 Rs / 1.10 GBP – 236 / 1091 (4.6)
Kilo Wheat Flour: 14 Rs / 0.3 GBP – 371 / 4,000 (10.7)
Kilo Potatoes: 10 Rs / 0.5 GBP – 520 / 2400 (4.6)
Kilo Pasta: 35 Rs / 0.8 GBP – 149 / 1,500 (10)
Kilo Red Lentils: 48 Rs / 1.2 GBP – 108 / 1,000 (9.2)
Kilo Chickpeas: 80 Rs / 1.3 GBP – 65 / 923 (14.2)
Kilo Sugar: 35 Rs / 1 GBP – 148 / 1,200 (8.1)
Kilo Carrots: 20 Rs / 0.85 GBP – 260 / 1412 (5.4)
Kilo Apples: 40 Rs / 1 GBP – 130 / 1200 (9.2)
Kilo Milk: 26 Rs / 0.75 GBP – 200 / 1600 (8)
Kilo Joghurt: 45 Rs / 2 GBP – 115 / 600 (5.2)
Liter Bottled Water: 12 Rs / 0.7 GBP – 433 / 1714 (4)

McChicken: 52 Rs / 1 GBP – 100 / 1200 (12)
Nescafe 50g: 63 Rs / 1.5 GBP – 86 / 800 (9.3)
0.5 Liter Bottle Coke: 20 Rs / 0.6 GBP – 260 / 2,000 (7.7)
Bottle Beer: 50 Rs / 1.3 GBP – 104 / 923 (8.9)
10 Cigarettes 30 Rs / 3 GBP – 173 / 400 (2.3)

Consumer Goods

Shirt: 150 Rs / 15 GBP – 35 / 80 (2.9)
Shoes: 250 Rs / 20 GBP – 21 / 60 (2.9)
Plastic Bucket: 60 Rs / 3 GBP – 86 / 400 (4.6)
Block Soap: 13 Rs / 0.6 GBP – 400 / 2000 (5)
Second-Hand Bicycle: 500 Rs / 30 GBP – 10 / 40 (4)
Nokia Mobile Phone: 1,500 Rs / 25 GBP – 3.5 / 48 (13.7)
Cheap Television: 5,000 Rs / 30 GBP – 1 / 40 (40)
Flat-Screen Television: 10,000 Rs / 110 GBP – 0.52 / 11 (21.1)
Fridge: 8,500 Rs / 100 GBP – 0.6 / 12 (20)
Washing Machine: 7,000 Rs / 120 GBP – 0.7 / 10 (14.3)
Dell Laptop Inspiron 14: 31,400 Rs / 500 GBP – 0.16 / 2.4 (15)
IPod Classic 80GB: 12,000 Rs / 179 GBP – 0.43 / 6.7 (15.9)
125cc Honda Motorbike Stunner CBF: 57,000 Rs / 2,300 GBP – 0.091 / 0.5 (5.5)
Basic Ford Fiesta 1.6: 650,000 Rs / 12,000 GBP – 0.008 / 0.1 (12.5)

Personal Service

Fresh Squeezed Fruit Juice: 20 Rs / 1.8 GBP – 260 / 666 (2.5)
Tea in Cafe: 4 Rs / 0,8 GBP – 1,300 / 1,500 (1.2)
Basic Meal: 20 Rs / 3 GBP – 260 / 400 (1.5)
Haircut: 20 Rs / 8 GBP – 260 / 150 (0.6)


Monthly Room Rent (three to a room): 400 Rs / 400 Rs – 13 / 3 (0.23)
Monthly Room Rent (working class room): 1,100 Rs / 400 GBP – 4.7 / 3 (0.64)
Monthly Room Rent (same standard): 5,000 Rs / 400 GBP – 1.04 / 3 (2.88)
Monthly Electricity Bill: 40 Rs / 30 GBP – 130 / 40 (0.3)


Innercity Bus Journey: 15 Rs / 1.2 GBP – 347 / 1,000 (2.9)
500 km Train Journey: 200 Rs / 60 GBP – 26 / 20 (0.77)
Flight Delhi-London AirIndia: 20,000 Rs / 310 GBP – 0.26 / 3.9 (15)
1 Week Thailand (Mallorca) incl. Flight: 15,000 Rs / 180 GBP – 0.35 / 6.6 (18.8)
Liter Petrol: 48 Rs / 1.2 GBP – 108 / 1,000 (9.3)

Knowledge Circulation

Daily Newspaper: 4 Rs / 1 GBP – 1,300 / 1,200 (0.77)
National Letter Stamp: 5 Rs / 0.41 GBP – 1040 / 2927 (2.8)
Soft-Back Book (Penguin): 200 Rs / 9 GBP – 26 / 133 (5.1)
Cinema: 50 Rs / 7 GBP – 104 / 171 (1.6)
Hour Internet: 15 Rs / 1 GBP – 347 / 1,200 (3.6)
Print of 7000 Copies 4 Pages A4: 4,000 Rs / 400 GBP – 1.3 / 3 (2.3)


Truck Driving License: 1,600 Rs / 1,400 GBP – 3.25 / 0.86 (0.26)
MBA Two Years Fees: 1,000,000 Rs / 49,900 GBP – 0.0052 / 0.024 (4.6)
Three Years Apprenticeship Mechanic: 187,200 Rs (three years no income) / free

The Political Economy of Oil Prices in India


Based on the recommendations of the Kirit Parikh Committee, the Government of India (GOI) on 25 June, 2010 announced the full deregulation of the prices of two crucial petroleum products: petrol and diesel.[1] Henceforth, prices of these two products will be determined by the unfettered play of market forces and government “subsidies” on these products, which worsen the fiscal situation, will be completely removed.[2] In one deft move, therefore, government control over the determination of the prices of these key commodities was willingly ceded to the magic of the market, presumably to “rationalize” prices and to wipe away losses of state-run Oil Market Companies (OMCs) to the tune of Rs. 22,000 crore.

There were generally three types of reactions to this announcement in the mainstream English news media. Firstly, the markets were ecstatic about the full liberalization of petrol and diesel prices and these sentiments were almost immediately reflected in rising oil stock prices.[3] Secondly, there were strident complaints that this policy change was not enough: prices of kerosene and liquefied petroleum gas (LPG) were still minimally under government control and therefore even after the deregulation move, the losses of the OMCs on account of these two petroleum products would stand at Rs. 53,000 crore for fiscal 2011.[4] Thirdly, various opposition parties have pursued their ‘Bharat Bandh’ without much vigor.

Before getting into a detailed analysis of the political economy of oil prices in India, let us quickly address three questions. Why are the financial markets and the mainstream media pleased with the liberalization of petrol and diesel prices? An important reason is that this policy shift is a victory for capitalist interests of a long drawn struggle against the regulation of oil prices in India. Using the myth of subsidization and fiscal burden, capitalist interests have long been pushing for the liberalization of oil prices. The first crucial victory of this struggle came in 2002 when the government dismantled the administrative pricing mechanism (APM). This move reduced the “subsidies” on petrol and diesel but the government decided to continue to “subsidize” kerosene and LPG. In 2005, the GOI constituted the Rangarajan Committee to study pricing and taxation of petroleum products.[5] This committee recommended a half-way house: a ceiling on the refinery gate price (computed according to the so-called trade parity formula) along with the freedom for OMCs to set retail prices. Of course, this was not enough. Accordingly, in 2009 the next committee was constituted to examine the same set of issues, i.e., the Kirit Parikh Committee.[6] In its report submitted in February 2010, the Kirit Parikh Committee finally recommended what the capitalist sector had been telling GOI all these years. It recommended full liberalization of petrol and diesel prices.[7] Although it was famously opined that the “executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie” we wonder whether it might be more reasonable to believe instead that “the committees of the Indian state are but committees for managing the affairs of the big bourgeoisie under neoliberalism.”

In any case, this immediately bring us to the second question: what will the next committee recommend? The Kirit Parikh Committee has allowed some minimal control over the prices of kerosene and LPG. Recall that the private sector is livid with the residual losses of the OMCs (often misleadingly equated to the “under recoveries”) to the tune of Rs. 53,000 crore resulting from the marginal control that had been retained in the pricing of kerosene and LPG. Thus, even if one does not know the exact date when the next committee on petroleum prices will be set up, one presumes that this yet-not-constituted committee will strongly recommend liberalization of kerosene and LPG prices. Otherwise, it would be either censored or ignored under the current arrangements.

The third question is related to the carefully constructed mythology of oil prices in India. One of the crucial components of the carefully nurtured mythology about oil (i.e., petrol, diesel, kerosene and LPG) prices in India is the idea that the government offers a huge subsidy to consumers. This subsidy, it is claimed routinely in government pronouncements, policy analyses and media reports, shows up as the “under recovery” of state-owned OMCs and pushes up the budget deficit of the government. The subsidization of oil products, follows the next step in the argument, is wasteful of scarce resources. It is ultimately unsustainable from a public finance perspective and should therefore be curtailed. How should this huge subsidy burden be curtailed? By withdrawing government control over petroleum product prices and letting market forces a free rein, or so runs the argument.

The wide currency of this argument would be obvious from even a cursory glance at mainstream media reports related to oil prices in India. A Business Standard report last year highlighted the close to Rs. 25,000 crore of “under recoveries” of the OMCs, dramatizing this “finding” by suggesting a revenue loss of Rs. 75 crore a day.[8] Similar reports find their way to the international media too. Earlier this year, Reuters highlighted the need for deregulation of oil prices because of the increasing burden of “under recoveries.”[9] A special 2008 report on BBC made the same point and speculated that Indian oil companies might be losing about 100 million US Dollars (USD) a day.[10] The Financial Times, in an editorial of July 6, 2010, argued for the need to phase out “subsidies” and end state control over petroleum prices.[11] Such pronouncements are not confined to media reports. It is also propagated by policy analysts in various research institutes. In a series of studies starting at least as early as 2006,[12] the International Energy Association (IEA) of the Organization for Economic Cooperation and Development (OECD) has highlighted the so-called fiscal burden of “under recoveries” of the OMC and has argued for the deregulation of oil prices.[13]

To sort through the complex of issues surrounding oil prices in India we need to address, at least, the following questions. Is the government really subsidizing petroleum products? Can “under recoveries” of the OMCs be understood as a measure of such subsidies? What, after all, are these “under recoveries”? Why is the private sector ecstatic with the deregulation of petrol and diesel prices? To answer these questions we will adopt a political economy perspective, i.e., we will try to see the class interests lurking behind the analysis of “experts”, changes in government policy and news coverage in the mainstream media. Once we carefully sort through the issues we will see that there is a simple motive force behind the whole complex of policy changes and committee recommendations: private sector PROFIT and more PROFIT.[14]


To understand the much talked about “under recoveries” of the OMCs, it would help to familiarize oneself with the structure of the oil industry in India. The industry starts at what analysts call the “upstream” end, the site of exploration and production of the primary component that gives all varieties of petroleum products: crude oil. The major state-owned players in the upstream sector are Oil and Natural Gas Corporation Ltd. (ONGC), and Oil India Ltd. (OIL); the major private sector players are Reliance, Cairn Energy, Hindustan Oil Exploration Company Ltd. (HOEC), and Premier Oil.

The output of the upstream sector is crude oil, which feeds into the “downstream” sector: the sector responsible for refining the crude oil to get petroleum products (like petrol, diesel, kerosene and LPG), marketing the final products, and development and maintenance of pipelines. The major state-owned entities in the downstream sector are Indian Oil Corporation Ltd. (IOCL), Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), and Mangalore Refinery and Petroleum Ltd. (MRPL); the major private sector players are Reliance, Essar and Shell.

The distinction between the upstream and downstream sectors give us several important prices. There are the price of crude oil, and the refinery gate price of petroleum products. The first is the price that refiners pay to purchase the crude oil (either from domestic or foreign producers), and the second is the price at which the refiners “sell” the petroleum products to the next stage of the industry. Note in passing that about 80 per cent of India’s crude requirement in 2008-09 was met with imports. Hence, this is the primary channel through which international prices of crude oil affects the Indian economy.

The final sector of the industry is that which maintains an interface with the consumers, the sector which takes care of transportation and distribution of the petroleum products to the retail outlets. The major state-owned players in this sector are GAIL (India) Ltd., and IOCL; the main private sector players is Petronet India Ltd., though Reliance, Essar and Shell have also entered into the fray. This brings us to the third important price in oil industry analysis, the pre-tax price: this price can be arrived at by adding marketing, storage and transportation costs to the refinery gate price of the relevant petroleum product. Adding excise duty (a form of tax levied by the Central Government) and sales tax (levied by State Governments) to the pre-tax price gives the final retail price of petroleum products, the price, for instance, that you or any of us pay at the petrol pump.

Let us summarize: the retail price of petroleum products (like petrol, diesel, kerosene and LPG) equals the sum of the price of crude oil, refining cost plus profit, marketing & storage cost plus profit, distribution cost plus dealer profit, and taxes & duties.


To clarify matters further and to get a firm grasp on the various prices that we have introduced, let us work through a concrete example. In July 2009, the average international price (FOB) of crude oil was 64.618 USD per barrel, which translates into 1.538 USD per gallon and hence 19.87 rupees per liter. Note that in converting from USD to rupees we are using the average exchange rate between the USD and rupees that prevailed in July 2009: 48.83 rupees per USD.[15] Two things should be kept in mind. First, in 2008-09, India imported about 80 percent of its crude oil consumption; second, in the current dispensation there is zero customs duty on crude oil.[16] Hence, for the oil industry in India, the price of crude oil was 19.87 rupees per liter.[17]


Figure 1: Price Build-Up for Petrol

In a written reply to a question in the Lok Sabha in August 2009, Petroleum Minister Murli Deora informed that “of the Rs 44.63 a litre retail selling price of petrol in Delhi, Rs 13.75 is because of the incidence of excise duty and Rs 7.44 a litre due to sales tax.”[18] Here we have two more prices: the retail price of petrol in Delhi(44.63 rupees per liter) and the pre-tax price of petrol (23.44 rupees per liter).

As far as we know refinery gate prices of petroleum products are not publicly available; hence we cannot give exact figures for these prices. But we do have publicly available information which allows us to provide rough estimates of refinery gate prices. In a November 2006 report on the cost structure of OMCs, we learn that the average operational and function costs (excluding labour cost) of the OMCs come to about 1.9 rupees per liter. Thus, if we deduct this amount from the pre-tax price of peterol (23.44 rupees per liter), we arrive at the following rough estimate of the refinery gate price of petrol in India in July 2009: 21.54 rupees per liter. This information is summarized in Figure 1 and 2.


Figure 2: Components of Retail Price of Petrol


With this background in place, we can now address the issue of “under recoveries”, which is misleadingly referred to either as “losses” or as “subsidy”. The OMCs “are currently sourcing their products from the refineries on import parity basis which then becomes their cost price. The difference between the cost price and the realized price represents the under-recoveries of the OMCs.” (Rangarajan Report, 2006, v). In other words, under recovery = import parity price – realized price. Realized price is something on which the government exercised some control. If this is fixed at a lower rate than the import parity price then under recovery shows up. But under recoveries are different from losses. To understand this we need to focus on the definition of import parity price. The Rangarajan Report informs us,

[i]mport parity pricing has been a commonly used approach in a regulatory context or in making a case for tariff protection. The argument in support of this approach is that in a situation where there is no domestic manufacture of a product, the cost of supplying it in the domestic market will be the landed cost which is the import parity price. However, even in a situation where there is domestic manufacture, import parity price can be taken as the international competitive price that sets the ceiling for the domestic price. When domestic refiners are given the import parity price, they enjoy a rent which is equivalent to the differential in ocean freight and associated costs as between crude and products. In such a situation, there is case for mandating the refiners to share the rent with public interest. (Rangarajan Committee Report, 2006, pp. 5)

In other words, import parity price is the price which one would pay if the good is imported. In India this is clearly not the case as demand for petroleum products (like petrol, diesel, kerosene and LPG) can be met by domestic refineries. Indeed, there is a 35% surplus refining capacity over the domestic demand (Sethi, 2010). The price at which domestic refineries can supply petroleum products (export parity price) is less than the import parity price. The difference was about 1.71 rupees per litre of diesel in April-Spetember 2005 (Rangarajan Committee Report, 2006, pp. 4). To correctly measure the under recoveries, therefore, a better formula would be to use export parity price as the benchmark. Using import parity price inflates the notional concept of under recovery, which is then trumpeted by the mainstream media as state-owned OMC losses. Secondly, it is also to be noted that the government had provided sumptuous subsidies towards building the refineries. It is but natural that the refineries share some burden by quoting a lower benchmark price. Instead, the private refineries are being allowed to sell products at import parity price to the state OMCs (Rangarajan Committee Report, 2006, pp. 30). The third reason why under recoveries are only notional and “are different from the actual profits and losses of the oil companies as per their published results” is that “[t]he latter take into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies.” (Rangarajan Committee Report, 2006, v). Public Sector oil companies do constitute an integrated structure – the notional losses of the OMCs are therefore shouldered by the upstream firms such as the ONGC, and GAIL (Rangarajan Committee Report, 2006, 30). They also are some of the biggest profit earners of the country[19]. Hence to talk about unsustainable susbsidies is a white lie.

To sum up: first, under recoveries can only occur when there is some control over the prices that OMCs can charge the consumers; if OMC were given full flexibility in terms of setting prices, they would probably always charge a price so as to keep the under recoveries to nil. Second, most of the OMCs don’t import petroleum products (like petrol, diesel, kerosene and LPG). They buy these products from refineries which, in turn, import crude oil. Thus, import parity price – which uses the import price of petroleum products instead of crude oil – is only a notional cost that they pay for the products they sell to the consumers. Hence, “under recoveries” of the OMCs refer only to a notional value of the losses of the OMCs; it is not a real quantity which figures on their balance sheets. Thus, it is a mistake to equate “under recoveries” with state-owned OMC losses, as the mainstream media constantly does. Of course, the meaning of under recoveries will change drastically if we allow private sector players into the scenario, as we will see later.

While the mainstream media commits the mistake of portraying the under recoveries of the OMCs as “losses”, government officials and policy analysts err by depicting the under recoveries as “subsidies” or “effective subsidies” (the 2009 IEA report and the Kirit Parikh Committee are notable recent examples). Let us see why.


It is meaningful to talk about government subsidies in relation to a commodity only when the tax revenue generated by the commodity (for the government) is lower than the subsidy that the government offers to producers/sellers of that commodity. Another way of saying the same thing is to insist on the usage of net subsidies: if the government tax revenue on a commodity is higher than the subsidy that it offers on that commodity, then on a net basis the subsidy is a negative quantity. In such a situation it is meaningless to say that the government subsidizes the commodity.


Figure 3: Financial Balances of the Oil Sector in India

Is the GOI subsidizing petroleum products in any meaningful sense, i.e., on a net basis? There is a simple way to answer this question: compare the total tax revenue coming from petroleum products to the exchequer with the sum of under recoveries and direct subsidies. Figure 3 plots precisely these quantities for the past few years. Note that the sources of the data in Figure 3 are as follows: (a) the data for under recovery, taxes (sales tax) and duties (excise and customs duties), and total revenue has been taken from the website of the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas, GOI, and the Kirit Parikh Committee Report; (b) the data for direct subsidy has been taken from Table 26, Basic Statistics on Indian Petrol and Natural Gas. [20]

Several interesting facts emerge from Figure 3. First, the direct subsidy of the GOI for petroleum products is extremely small. In fact, direct subsidy is a tiny fraction (less than 1 percent) of the total tax revenues from the oil sector. Second, the total contribution of the oil sector to the exchequer has been higher than the sum of under recoveries of the OMCs and direct subsidies on petroleum products for all the years since fiscal 2004. Third, even the sum of duties (customs and excise) and (sales) taxes on petroleum products, which is only a fraction of the total contribution of the oil sector to the exchequer, has exceeded the sum of under recoveries of the OMCs and direct subsidies in all the years since 2004-05. The inescapable conclusion from Figure 3 is that there is a negative net subsidy on petroleum products in India. Another way of saying the same thing is that the government extracts a net positive tax revenue from petroleum products in India. The oft-repeated assertion that petroleum products are subsidized in India is simply not true.


We have suggested, so far in our analysis, that under recoveries of the state-owned OMC are neither financial losses (because notional prices are used) nor can they be used as measures of subsidization (because there is negative net subsidy on the oil sector).

What are they? Why is the private sector and the mainstream media so concerned about under recoveries?

To get a handle on this important issue, let us imagine a vertically integrated, state-run corporation that sells petroleum products. This corporation imports crude oil, much like India does today, refines it to produce petroleum products and sells it to consumers. Thus, this corporation contains within itself both the upstream and the downstream sectors of the industry, as well as the retailers/dealers. If the final price at which this hypothetical corporation sells petroleum products to the consumer is higher than the sum of the price of crude oil, the cost of refining & distribution (with some rate of return included) and taxes/duties, then this corporation would be said to be making a profit (from the perspective of the people of the country).

Now, let us break up this hypothetical state-owned corporation into two parts, one of which is involved only in refining and the other only in distribution, both still being state-owned. In this case, there will be two balance sheets and the transaction that was earlier internal to the big corporation would now show up as sale/purchase between the two smaller corporations. Even in this case, we would adopt the same procedure as above to see whether the two firms taken together are making a profit: if the final retail price is higher than the sum of the price of crude oil, the cost of refining & distribution (with the same rate of return as before included for both corporations now) and taxes/duties, then the arrangement is profitable. In other words, it does not matter if “losses” show up in the balance sheet of one of the corporations as long as the government’s tax revenue is adequate to cover that “loss”.

Thus, if the government administratively fixes the price of petroleum products such that the distribution corporation suffers under recoveries, it is hardly a matter for concern because (a) the government’s tax revenues are far above the under recovery of the state distribution corporation (in our example), (b) upstream firms make enough profits to bear the burden. This is more or less the situation of the oil sector in India if we consider the state-owned upstream and downstream corporations taken together. Since the total revenue from the sector, and government taxes, are higher than the “losses” showing up on the balance sheets of some of the corporations, Indian society is not making a net loss.

The last and crucial step of the argument is to allow private sector players into the scenario and see how everything changes drastically. Continuing with the example, suppose now, we have, in addition to the two state-owned corporations, a private corporation. This hypothetical capitalist firm is involved in refining and distribution. Now, it is obvious that government control over prices that lead to “under recoveries” would translate into true losses or lower rates of profit for the private corporation. If the realized price is lower than the import parity price, in the balance sheet of the private OMC it would show up as loss – provided the OMC adopts the import parity price as the benchmark. But since the private firm has the refining facilities arm, like Reliance for instance, overall the firm might still make a profit because (a) taking import parity price as the benchmark means high profit margin for the refinery, (b) even without this high margin the refinery may itself be profitable enough to make up for the loss of the private OMC. Nevertheless, let us note that decontrolling the “realized price” promises even higher opportunities to earn profits for the private sector firm, as no under recovery now shows up.

That really brings us to the crux of the matter as regards under recoveries. The under recoveries of the OMCs do not mean much as long as they are covered by the tax revenue of the oil sector only when private sector players are absent from the scenario. As soon as private sector players enter the picture, the under recoveries of OMCs become a proxy for the losses of private sector players. Since the private sector wants to enter the oil sector and earn windfalls, it highlights the under recoveries and policy analysts endeavor to show it as a burden and the mainstream media faithfully relays that concern. The way to remove the under recoveries, i.e., the way to ensure a positive and high rate of profit for private capital in the oil sector is to do away with cause of under recoveries: government control over petroleum product prices. Hence, the recommendations of various “experts” is to liberalize oil prices, and the GOI, by accepting and implementing that recommendation is working to ensure high and positive rates of profit for private capital in the oil sector.

Let us end with an example that you can chew. From Petroleum Minister Murli Deora’s answer to the Lok Sabha we know that the pre-tax price of petrol was about 23.44 rupees per liter in July 2009; if Reliance or Essar sold petrol in Delhi in July 2009, this is roughly the after-tax revenue it would make on each liter of petrol. What would be an estimate of the cost that Reliance or Essar would bear for a liter of petrol? In July 2009, the average international (FOB) price of crude oil was, as we have already noted, 64.618 USD per barrel, which translates into 19.87 rupees per liter.. Thus, if Reliance or Essar imported crude for their refineries, they would pay about 19.87 rupees for each liter.

What mark-up over processing and marketing cost would they want? The average international pre-tax price of gasoline in July 2009 was about 2.33 USD per gallon; since the international price of crude oil was 1.538 USD per gallon, this implies a mark-up over processing and marketing cost of 1.515 (= 2.33/1.538). Thus, for an international oil company, the price of petrol (gasoline) was set at about 152 per cent of the cost (of crude oil). It seems reasonable to assume that Indian capital would also like a similar, if not higher, mark-up over cost. Thus, in July 2009 Reliance or Essar or Shell would have liked to be able to set a pre-tax retail price that was 152 percent of the cost of crude oil. So, what pre-tax price of petrol in India would have been required to ensure an internationally competitive mark-up over processing and marketing cost? The answer is 30.20 rupees per liter (= 19.87 * 1.52).

Now things are clear. According to the Petroleum Minister, the pre-tax price of petrol in Delhi was only 23.44 rupees per liter in July 2009; that meant, using an international rate of return benchmark, a 6.75 rupees per liter less profit for a private sector player like Reliance. That, it is clear, was enough to create a hullabaloo about under recoveries and fiscal burden and the efficiency of the market and push the government to set up the Kirit Parikh Committee and decontrol petrol and diesel prices. Profit, you see, is what this whole fuss is about.

Resources for Further Study:

Rangarajan Committee Report:

Kirit Parikh Committee Report:

Surya Sethi’s 2010 EPW article: “Analysing the Parikh Committee Report on Pricing of Petroleum Products,” Economic and Political Weekly, March 27, 2010. [PDF] »



[2] The Times of India has reported that diesel prices have not yet been fully deregulated. This is misleading. The very first paragraph of the press release of the government ( says: “In the light of Government’s budgetary constraints and the growing imperative for fiscal consolidation, and the need for allocating more funds to social sector schemes for the common man, the Government has decided that the pricing of Petrol and Diesel both at the refinery gate and the retail level will be market-determined.” (emphasis added) The next sentence of the press release has the caveat that the TOI report picks on: “However, in respect of Diesel, the initial increase in retail selling price of Diesel will be Rs. 2 per litre at Delhi, with corresponding increases in other parts of the country. Further increases will be made by the Public Sector Oil Marketing Companies (OMCs) in consultation with the Ministry of Petroleum & Natural Gas.” So, it is true that any price increase of diesel which is over Rs. 2 will require government consent at the moment, but this seems mere window dressing given that the principle of market-determined retail prices has been accepted and loudly affirmed.





[7] Writing on the budget earlier in the year, Debarshi Das had already noted the government’s move towards decontrolling prices of petroleum products to facilitate the growth of private profit:







[14] Some of the points raised in this article were also made by Surya Sethi in a post-budget analysis in the EPW (“Analysing the Parikh Committee Report on Pricing of Petroleum Products,” Economic and Political Weekly, March 27, 2010)

[15] International prices of crude oil and other petroleum products can be found here:

[16] Paragraph 4.43, Kirit Parikh Committee Report.

[17] To be more precise, we will need to add the the cost of insurance, ocean freight, ocean loss; this quantity is typically assumed to be about Rs 50 per tonne ( Since it is not very large, for our current computation, we will ignore it.