With the Kirit Parikh panel unanimously endorsing freeing up fuel prices, the stage is set once again for a vexing political debate. The imperatives are obvious. That the Union government’s finances are under strain has been evident for some time.
Its past practice of outsourcing petroleum subsidies—the difference between the cost and the retail price—too has run its course with government-owned oil companies unable to absorb any further burden. All the more because international crude oil prices are no longer in the zone of $30 (Rs1,398) a barrel.
While the economic compulsions are obvious, the political ones are not—largely due to bad timing. Inflation has been rising steadily, with food prices increasing at double digit pace, touching 20% recently.
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Politicians, even within the Congress party, are becoming restless, especially since it now appears that mismanagement of policy—an inability to react in time—has been a contributory factor. As a result, it is now simply a question of whether the government has the courage to bite the bullet, as it were.
The situation is very similar to what prevailed 13 years ago, when another coalition, the United Front (UF), initiated moves to dismantle the administered price regime. It was, in fact, among the last decisions of the government headed by I.K. Gujral although it was preceded by nearly three years of policy discussion at various levels by three different governments.
It all started towards the end of the tenure of the government led by P.V. Narasimha Rao. Satish Sharma, who was the then petroleum minister, initiated the setting up of an R-group (where R stood for reform) under the chairmanship of the then petroleum secretary Vijay Kelkar. It was a government committee, yet it included private sector representatives such as Aditya Birla and Mukesh Ambani. The simple idea was to set out a reforms road map for restructuring the petroleum sector that would, while recognizing the unfortunate truth about India’s dependence on imports to meet nearly three-quarters of its demand, seek to put in place an environment that would ensure efficient use of energy through an appropriate tariff regime.
The R-group, which received crucial inputs from two technical groups, came to the conclusion that the existing administered price mechanism (APM) had to be dismantled. But in those three years, the regime at the Centre changed three times—the Congress lost the 1995 general election and was replaced by a coalition led by H.D. Deve Gowda, which then gave way to another version of the UF regime under Gujral. It probably made it easier as politicians of different hues had engaged in the policy discussion. Eventually, when it came up before the Gujral cabinet, it found strong support from P. Chidambaram, then finance minister, and most interestingly, from then defence minister Mulayam Singh Yadav.
Some of those associated with the momentous decision recall how Yadav surprised the entire cabinet by saying that the government should go ahead. The motion, not surprisingly, was carried and the decision was in place—coincidentally just before the government demitted office.
It was a very ambitious and politically courageous decision. It laid down a map for dismantling the APM in a phased manner (domestic fuel oil prices were linked to international prices) and to switch over to full deregulation by the end of March 2002; alongside, it also proposed a staggered increase in the price of kerosene sold through the public distribution system and a progressive reduction in the subsidy on domestic liquefied petroleum gas.
However, subsequent governments, especially those led by the Bharatiya Janata Party, were unwilling to expend political capital in defending unpopular decisions to periodically revise domestic fuel oil prices in tandem with changes in international prices. As a result, parts of the petroleum sector reforms were rolled back.
That is, until the Congress-led United Progressive Alliance (UPA) decided to revisit the idea four years ago. It did so, as it had done in 1995, by setting up a committee under C. Rangarajan, former Reserve Bank of India governor, in 2006; this was followed up by another panel under B.K. Chaturvedi, which gave its recommendations in 2008, and finally the Parikh panel that submitted its report last week. The common thread was a recommendation to free petroleum prices. Four years of expert advice by three different committees has concluded that there is no other option.
Politically, though, it is not easy to follow. There is comfort in the fact that the UPA is in a majority and the Opposition is still fragmented—yet to recover from the aftershocks of the surprising verdict in the 15th general election that declared the Congress-led coalition the clear winner. Further, the impending political battles at the state level are still a year away.
Philosophically, Prime Minister Manmohan Singh can take heart not just from his record as a reforms warrior, but also from the words of a senior associate, the late I.G. Patel. The erudite economist wrote very compellingly in his memoirs: “Economics at the end of the day is about choice; and the right, ability and desire to choose—which includes choosing something difficult, not yet there and working for it.”
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comment at firstname.lastname@example.org