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
grkmurty
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