The decision by the Congress-led United Progressive Alliance (UPA) to attempt decontrol of fuel prices after a lapse of 13 years is seemingly associated with a series of coincidences. In actual fact, it is more by design than coincidence.
First off, the decision was announced almost simultaneously with the India Meteorological Department’s (IMD) revised projection of an excellent monsoon. Second, railway minister Mamata Banerjee chose to be absent from the meeting of the empowered group of ministers (eGoM) on the day it finalized its decision. Third, the decontrol move came just ahead of the weekend meeting of the Group of 20 (G-20) heads of state in Toronto, Canada. Fourth, the eGoM that took the call to decontrol fuel prices was headed by finance minister Pranab Mukherjee.
All four are not random events and are inter-linked. In fact, they explain the political economy of the UPA’s surprise announcement of such a big-ticket reform.
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The IMD’s revised forecast now pegs the probability of a good monsoon at 102% of the 50-year average—four points above its earlier projection. Not only does it project heavy rainfall in the months of July and August—the peak of the monsoon—it also expects it to be spread evenly.
Coming as it does against the backdrop of a drought last year, it is welcome relief—and more importantly it cushions the bad news that prices of petroleum products have been increased.
Banerjee’s decision to stay away is consistent with her politics of denial, which will run its course sooner if not later. The UPA and she have struck a perfect equilibrium; both can’t do without each other and the only way they can paper over their differences is by exercising selective amnesia. While she may have cleverly transferred the onus onto the Congress, she has also sent out an unambiguous signal about her reluctance to shoulder the weight of tough political decisions that have an impact on the economy.
The decision to decontrol fuel prices is a huge plus for Prime Minister Manmohan Singh ahead of the G-20 meeting. It shows Singh—and India—in a very positive light as a brave reformer. It is a nice mantle to possess, especially since India has exhibited its desire to be part of the global high table. His home minister P. Chidambaram spent the weekend, meanwhile, in a successful stint of public diplomacy with estranged neighbour Pakistan.
Probably most important is the leadership of the eGoM. It is indeed no coincidence, but a fact that it was Mukherjee’s leadership which has finally given this grouping the belief that it had to get on with a very inconvenient decision that would both in the short and the long run bring relief to the burgeoning fiscal deficit. The logic is not difficult to comprehend. Anyone following Mukherjee’s public comments, in Parliament and outside, in the last six months or so would be aware of the pains the finance minister has taken to rub home the need for fiscal prudence.
Coming from him it is important. Unlike, say technocrats, who are versed in the art of fiscal speak as it were, Mukherjee is a quintessential politician who was groomed under the leadership of Indira Gandhi. For him to articulate the importance of fiscal prudence with such regularity is not second nature. And the fact he does should make others sit up and take notice. Clearly the finance minister is concerned about fiscal balance—the urgency may be a consequence of the meltdown in Greece—as much as he is concerned about the economy losing its growth momentum, knowing fully well that both are inextricably intertwined.
In both, he sees the sustainability of the unprecedented surge in growth witnessed in the last decade. Rebalancing the fisc would mean giving the Reserve Bank of India its legitimate room to manage the monetary economy; the internal debt to gross domestic product ratio is somewhere upwards of 70% at present.
Ensuring that growth does not suffer will mean the difference between recovery and disaster. It is one of the key factors that differentiates India from the other economies dealing with the global crisis. Last year should serve an example: A relative loss of momentum severely impacted tax revenue and had a causative impact on the fiscal deficit.
It is, therefore, not difficult to comprehend why Mukherjee and his colleagues did what they did within 24 hours of the minister returning on Thursday from Washington after attending the India-US CEO summit.
Economists may argue that it was not the best time, especially with inflation about to top 11%, to withdraw subsidies and let prices rise. But then there is never really a good time to deliver bad news.
Politically, the UPA is gambling on its image, assiduously developed over the last five years, of being pro-poor. It is readying a universal food security Act to follow up on its popular rural employment guarantee scheme. Given that this will soak up a large amount of resources, it has decided to make up by cutting subsidies elsewhere; the changes effected on Friday are expected to lower the subsidy burden by about Rs19,000 crore—that is almost half the spending undertaken on the employment guarantee scheme.
The big question is whether it will be sufficient. The monsoon session of Parliament will be the real test.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at email@example.com