Prime Minister Manmohan Singh spoke just after the presentation of the Union Budget and suggested the government would ?bite the bullet? while dealing with the burgeoning oil subsidies, the single biggest political economy question facing the UPA today. It will not be an exaggeration to suggest that the key assumptions in the Union Budget?GDP, inflation and fiscal deficit numbers?are almost entirely predicated on how international oil prices move and the consequent domestic adjustment of prices happen. The success or failure of Pranab Mukherjee?s Budget depends largely on whether the UPA is able to politically sell a substantial upward adjustment of domestic oil prices.
The finance minister also specifically referred to Manmohan Singh?s ?bite the bullet? remark, and said the government had no option but to raise domestic prices of diesel, petrol and LPG.
However, there is such a crisis of credibility that no one believes that the UPA can summon enough courage to take tough decisions any more. Manmohan Singh hinted that he will consult his allies on the issue of oil prices. The Congress seems to have given up on Mamata Banerjee and is looking for critical support from the Samajwadi Party (SP). There is a move to get the SP to participate in the government too.
My reading of the political tea leaves is it will be difficult for the Congress to get the SP to agree to across-the-board hikes in oil prices in the months ahead. The SP has tasted blood and, after getting such a thumping majority in the Uttar Pradesh assembly, it is buoyed by the self-belief that it could get the bulk of the 80 Lok Sabha seats in UP whenever general elections are held. So this belief will make the SP very wary of getting into any arrangement with the Congress where it has to share the blame for some of the ?tough and unpopular? decisions of the UPA.
The Congress may have enough incentive to go for broke and take tough decisions because it has really nothing much to lose now, especially after its dismal showing in the assembly elections. But the other political parties, allies and potential allies of the Congress will have no such incentive to be part of such a strategy. If anything, the tendency of parties like the SP would be to distance themselves from the worsening image of the Congress in times ahead.
Interestingly, Akhilesh Yadav even commented on the Budget and said he would find it difficult to accept any decision that hurts the farmers of UP. The subtext is that his party will not be able to accept decisions to raise diesel or fertiliser prices. The price and availability of fertiliser was the single biggest issue for the farmers at the UP elections.
So the UPA will find it difficult to raise oil prices enough to meet key Budget assumptions such as cutting the total subsidy to below 2% of GDP over the next one year from 2.5% of GDP now. This job becomes worse if international oil prices stay above $120 a barrel because the Budget assumes the international oil prices to be $115 per barrel. Of course, on the flip side, it will be a relief if oil prices for some reason?like a permanent thaw in the US-Iran standoff?are back to $100 a barrel. These are the ifs and buts that the UPA, already with its back to the wall, will have to live with.
Meanwhile, Manmohan Singh and Pranab Mukherjee can possibly sell one big idea to both Mulayam Singh Yadav and Mamata Banerjee. The government could devise a system to make the better-off urban middle class pay market prices for diesel while sparing the farmers. This could become palatable to the SP. The total under-recoveries on diesel is about R80,000 crore and it is by far the biggest chunk of all oil subsidies. About 15% to 18% of this is used in motor vehicles in urban and semi-urban areas. Similarly, the price of LPG could also be increased without too much protest.
Some of these politically-creative solutions could help in making the Budget assumptions work. Of course, the best way to get the Budget numbers to come good is to get growth back on track. Once the GDP recovers, everything else would fall in place. Some economists have expressed worry about inflation coming back due to an increase in excise duties and some hike in oil prices.
My sense is that persistently high inflation over the past two years has already caused enough demand destruction and has brought GDP growth down to 6.1% in the third quarter of 2011-12. FMCG manufacturers reeling from a single-digit growth in sales may be cautious about passing on the entire excise hike to the consumer. The industry would rather grow its volumes than seek pricing power at this stage.
So the worry at this stage should be clearly about reviving growth and investment. RBI also seems to have understood this imperative. In an unusual act, it officially briefed the media in Mumbai after the Budget presentation in New Delhi. It seemed like a goodwill gesture from Mint Street to North Block as Deputy Governor Subir Gokarn suggested that the fiscal deficit projected at 5.1% seemed credible and realistic. Finally, Mint Street seems to be appreciating the efforts by North Block at fiscal consolidation. Will this thaw lead to a reduction in interest rates in mid-April? That is the million-dollar question!
mk.venu@expressindia.com