Diesel, deficit, decisions

Diesel price hike, though as per prescription, is a weak medicine. But is it the start of a new initiative?
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First Published: Fri, Sep 14 2012. 01 54 PM IST
Even after the hike, the oil marketing companies will still be subsidizing every litre of diesel by about `9, and their losses will be cut by less than half. Photo: Ramesh Pathania/Mint
Even after the hike, the oil marketing companies will still be subsidizing every litre of diesel by about Rs.9, and their losses will be cut by less than half. Photo: Ramesh Pathania/Mint
Updated: Fri, Sep 14 2012. 02 55 PM IST
The reactions to the government raising diesel prices have played to the script. United Progressive Alliance (UPA) partners Trinamool Congress and Dravida Munnetra Kazhagam (DMK) made sure their representatives did not attend the cabinet committee meeting, and as soon as the decision was announced, expressed anger, dismay and—as is de rigueur for Trinamool—a promise to take to the streets. (It may be interesting to study last few years’ sales data of cheap footwear in West Bengal—so many street demonstrations must commercially benefit someone somewhere). Even loyal ally Nationalist Congress Party (NCP) has protested, and the Bharatiya Janata Party (BJP) has called it “financial terror” (P.Chidambaram and S. Jaipal Reddy blowing up Hindustan Petroleum Corp. Ltd oil tankers in front of the Reserve Bank of India (RBI)?). The Samajwadi Party (SP), which among all political parties is having the most fun right now, has also disapproved. A partial rollback cannot be ruled out.
Meanwhile, on the morning after, India’s 10-year government bonds advanced by the most in more than five weeks; the rupee gained 1.2% against the dollar, and the BSE Sensex rose 2%. The three state-run oil refiners, which lost more than Rs.40,000 last quarter, are of course happy, but do policymakers care a hoot about what they think? Anyway, even after the hike, they will still be subsidizing every litre of diesel by about Rs.9, and their losses will be cut by less than half.
Optimists are now hoping that RBI will lower interest rates. The central bank has made it abundantly clear that it’s not going to do that till the government shows some serious intent about curbing the fiscal deficit. Well, the government has now certainly shown some intent. Trouble is, RBI may not consider it enough. Just this one move is not going to bring the projected fiscal deficit down anywhere near the budgeted 5.1%. Also, the hike in diesel prices will most likely result in short-term inflationary pressures, and in its projections of year-end inflation, the bank had factored in a fuel price revision. So, things may not have really changed much from the central bank’s point of view. Unless, that is, the finance minister can pull off a great backstage convincing act.
Food and fertilizer subsidies are of course out of bounds, but if the government can push through its disinvestment proposals, that could cheer up a lot of people. Its score will definitely rise on the “intent scale”, as far as the international credit rating agency fusspots are concerned; they have been muttering grimly about shoving India below investment grade (There is something definitely wrong here. Why do we have the same Standard and Poor’s rating and outlook as, say, Spain? Spain is officially in recession, capital flight from the country in the last quarter equalled 50% of gross domestic product (GDP) in those three months, and there’s an exodus of the educated and entrepreneurial elite from Spain. Clearly, India has a huge image problem that is unduly influencing the number crunchers).
Just a hike in the diesel price is, at best, a weak medicine. But is it the start of a new initiative? Or will this apparently giant leap for the UPA government remain merely an exploratory baby step before it decides to rest again? For, even though one is aware that there are promises to keep and miles to go before one sleeps, one has to admit that the woods are lovely, dark and deep.
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First Published: Fri, Sep 14 2012. 01 54 PM IST
More Topics: Views | Diesel | Price rise | Fuel | Fiscal deficit |
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