There is a strong political message in UPA?s bold decision to decontrol the prices of petrol and diesel, and to gradually target, more tightly, the subsidies on kerosene and LPG. The political message is directed at both the domestic constituency and the international community, which is increasingly building pressure in regard to the conservation and optimal pricing of fossil fuels. India, as a responsible member of the various multilateral organisations, can ill-afford to ignore the new thinking on the pricing of fossil fuels, especially in the context of evolving climate change protocols.
No wonder, in an article authored on the eve of the G-20 meeting in Toronto, the US Treasury secretary Tim Geithner specifically said America expects to get some agreement among the G-20 nations on how the fossil fuel subsidies would be brought down. In a sense, the big bang decision to decontrol the price of some fuels and the courage displayed by the UPA to increase the price of kerosene, a holy cow not touched for many years, will be welcomed by other G-20 members in the context of forging a global policy on rational pricing of fossil fuels. Though India?s share of global GDP on a purchase power parity basis is about 5%, its share of fossil fuel subsidy offered worldwide could be close to 15% if you also include the massive underpricing of domestic coal, where the benefit goes to companies that own captive coal mines.
Clearly India has a lot to answer for in the way it prices fossil fuels. It is just as well that the UPA timed the long overdue decision to reform the pricing of oil just before the G-20 meeting in Toronto. India?s negotiators will be far less defensive on the issue of fossil fuel subsidy, just as the Chinese will be less defensive on the issue of yuan revaluation. It is becoming apparent that both China and India, seen as rising economic powers, will have to shoulder greater responsibility in maintaining a rational and stable economic order in the years ahead.
On the domestic political front, the UPA has indeed taken a calculated risk in raising prices of fuels, especially kerosene. Both Congress president Sonia Gandhi and finance minister Pranab Mukherjee appeared to have done their homework well this time around. In the past, we have witnessed a partial roll-back of oil prices due to communication gap between the government and party. Pranab Mukherjee seems to have impressed upon key allies like Trinamool Congress, NCP and DMK that there was no other alternative but to increase the price of oil, if the sanctity of the Union budget were to be maintained.
The finance minister had committed in his budget statement that oil subsidy will not be put as a below the line item. In the past, the government essentially showed these as a liability, which did not translate into a higher budget deficit as it was kept outside the government balance sheet. This non-transparent practice has been done away with. Mind you, even after the current price increases, the government will still have to meet a subsidy bill of about Rs 50,000 crore. But things will be far more manageable than before.
The price increase, in some ways, also amounts to a partial withdrawal of the fiscal stimulus because the oil subsidies acted as an income transfer to the consumer. Politically, the government will have to hone its communication skills and tell the people that the oil price hike will only temporarily increase the wholesale price index. The WPI inflation rate could go up by 0.9%, according to the Chief Economic Advisor, Kaushik Basu. Consequently, the overall inflation rate could cross 11% by August, say analysts. Basu has argued that inflation will go up sharply in the short run but will moderate in the medium term because of fiscal correction and a reduced budget deficit. This is an economist?s logic, which needs to be packaged in an effective political message.
At a broader level, the Congress leadership has taken a calculated risk based on an understanding that the current rise in food and manufacturing inflation rates is partly being caused by a robust rise in household incomes across rural India. This was partly fed by the big government spending on social and farm sectors towards the end of UPA-1?s tenure. There is a view, now accepted by many within the Congress leadership, that rural incomes have risen faster than the rate of inflation, thereby protecting real incomes adequately. Even RBI seems to be somewhat sympathetic to this line of thinking, which is why RBI is moving very gradually in raising interest rates. Politically, the Congress is saying that double-digit inflation will have to be tolerated in the short run. It is this line of thinking that has emboldened the UPA to raise oil prices. This strategy might work, provided the UPA takes care of its distribution logistic and succeeds in delivering subsidised food to 37% of the population under the proposed food security legislation.
By decontrolling petrol and diesel prices, the UPA has shown some resolve that it can take tough decisions to withdraw subsidies from those who must pay more. Oil prices must get totally depoliticised in due course. This is the only rational thing to do.
mk.venu@expressindia.com