This week’s petrol riots in Iran may seem very far removed from any Indian concerns. But it is a very good example of the damage that bad economic policy can inflict on a country. Car owners in Teheran have gone on a rampage after the Iranian government said it would be rationing petrol in the future.
Iran is well endowed with oil and gas reserves. Yet, it spends around $10 billion a year to import fuel. Why? First, the government there subsidizes petrol by selling it to consumers below import prices. This is an invitation to wasteful use of what is otherwise a scarce resource. Second, $10 billion of fuel subsidies means $10 billion less for investment in oil production and refining.
In effect, fuel subsidies in Iran pander to consumption at the cost of investments in future capacity.
There is usually an outcry in India when fuel prices are hiked. What critics do not seem to understand is that fuel subsidies are damaging in the long run. Look at Iran.