The United Progressive Alliance government has done well to increase domestic fuel prices at a time when inflation is yet at intolerably high levels and global oil prices have softened a bit. One easy way out would have been to try to repress inflation by maintaining domestic prices at artificially low levels.
The most immediate impact on the Indian economy could well be negative, as inflation rises despite the cut in indirect taxes on fuel. But there are clear long-term benefits, from the boost to the tattered financials of public sector oil companies to the cut in the government’s subsidy bill. A further benefit is that higher prices will discipline consumers.
But most important of all, the government has shown some guts at a time when there are fears about the drift in policy. The recent months have seen confidence in the abilities of the regime plummet. We hope this is a first step out of the morass.