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Monday, September 17, 2012

Diesel Price Hike: Right, But Not Good Enough

When Prime Minister Manmohan Singh, from the ramparts of the Red Fort on the occasion of Independence Day, lamented over the ‘learned helplessness’ that the country is suffering from currently—“As far as creating an environment within the country for rapid economic growth is concerned, I believe that we are not being able to achieve this because of a lack of political consensus on many issues. Time has now come to view the issues which affect our development processes as matters of national security. If we do not increase the pace of the country’s economic growth, take steps to encourage new investment in the economy, improve the management of Government finances and work for the livelihood security of the common man and energy security of the country, then it most certainly affects our national security”—no one thought that he would so soon muster enough gumption to hike diesel price by Rs. 5 per litre, limit subsidy on LPG for six cylinders per year, and importantly, steer his cabinet committee to give its nod to throw open aviation, broadcasting services, power exchanges and multi-brand retail to FDI, despite the known opposition of not only his coalition partners but also other political parties. 
This indeed is a good move, though not a well thought out, for it gives an assurance to the investors as well to the rating agencies that the government is at last willing to bite the bullet. Politically, it is nevertheless a brave act—an act that is similar to the determination that the prime minister exhibited while pursuing the clearance of the nuclear bill by the Parliament. 
The price hike in diesel is long overdue, for: one, the under-recoveries of oil companies stood at Rs.1,38,541 crore during 2011-12, while the same is estimated to touch a whopping figure of Rs. 1,87,127 for the fiscal 2012-13; two, the resultant burden on the government as oil-subsidy stood at Rs. 1,38,541 crore for fiscal 2011-12, while it can be anywhere above Rs. 1,87,000 crore for fiscal 2012-13; and three, cumulatively, all this leads to a situation of worse fiscal deficit scenario.
Over it, the inflation for August stood at 7.6%—up from about 7% during July. And any further worsening of fiscal deficit situation is sure to raise inflation further, for the current inflation is more an outcome of supply-side constraints. It means more hardship to the common man. Also, it is time that the nation appreciated the fact that under-recovery from the consumer for the oil consumed—be it by a rich SUV-owner or a rich household consuming gas— and making it good through government subsidy will, in effect, be at the cost of the welfare of the common man. For, funds to the extent of subsidy provided by the budget to the oil companies will simply knock off the opportunity for fresh investment that would have resulted in new employment, that too, year after year, thereby improving economic growth.  Indeed, it is growth in real economy alone that would improve the lot of common man on a sustainable basis. Subsidies, at best, can only give temporary relief, and unwittingly, this relief is mostly pocketed by the well-off sections of the society, if market reports about the recent rise in sales of diesel-driven SUVs are true.  

Politics aside, the measures announced by the prime minister are inevitable in the present context of the Indian economy that is suffering from the worsening fiscal deficit, free-falling rupee, widening current account deficit and declining GDP growth rate, coupled with what is happening across the globe. Falling prey to populism, if the government allows fiscal deficit to grow unchecked, it is sure to land the country in a kind of stagflation. For, unchecked growth in fiscal deficit is a sure recipe for disaster, as it simply compels the government to borrow heavily from the market to cover its deficit. This in turn will crowd out the private investors from the credit market. Which means, fall in industrial investments, which eventually results in fall in industrial output, jobs, etc.

In fact, the present hike of Rs. 5 per litre is not sufficient enough to fully eliminate oil subsidy, for it hardly addresses the gap of 20% of the total under-recovery of oil companies. Again, no one is sure how much has to be rolled back to wean away the opposition parties from resistance.  That being the reality, what is needed is another diesel price hike. Indeed, had the government raised diesel prices in small amounts at regular intervals so as to ultimately recover the full cost on a sustainable basis, it would not have given the opposition an opportunity to raise a hue and cry.

Now, coming to opening up of aviation, broadcasting services and retail sectors for FDI, it must be said that it would not result in any appreciable immediate benefits, for the kind of crisis the sovereigns in EU are currently facing and America’s preoccupation with its presidential elections may not encourage free flow of capital across the borders.  Again, in retail, now it is the states which have to take a call whether to open their markets to overseas players. Nevertheless, these announcements are likely to revive the India story among the overseas investors and analysts. It might, of course, result in a temporary stock market rally. Here again, no one is sure if there will be no rollback. But once implemented, FDI in retail can certainly lead to improvements in supply-chain technology in the country. 

It is only addressing the major issues, such as infrastructure creation by resolving the ills associated with public-private partnerships, solving problems associated with labor and land acquisition, issues of corruption, and reining in fiscal deficit, that can set right the macro imbalances on a sustainable basis, paving the way for economic grow



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