By R Jagannathan
Scene 1: Reserve Bank Governor D Subbarao is busy crimping gold imports, tightening short-term liquidity, and generally stamping out speculation in the foreign exchange market to make sure that the rupee doesn't fall further.
Scene 2: Oil minister Veerappa Moily petitions the finance ministry to provide more for oil subsidies since the rupee has made oil marketing companies' losses worse. This leaves the government with two options: let the budget deficit rip, or let the oil companies wallow in losses.
What's the connection between the two? The answer: not fixing the primary problem (oil prices) has led to the other (a falling rupee), making the oil price issue more difficult to solve in the process. It's not gold imports, but oil imports - the biggest item in our import bill - that is the cause of the current account deficit (CAD) crisis.
The rupee is crashing because the oil import bill is simply too big, and this bill is too big because oil prices increases - especially diesel - are too small to make an impact.
The economy has become immune to tiny diesel price hikes, when it needs shock treatment.
Consider how fast we have run to stay in the same place.
On 17 January this year, the UPA government summoned up the courage to let oil companies raise diesel prices in small doses of 50 paise a month. In that month, the losses suffered by oil companies were around Rs 9.60 a litre. The pink press hailed this as "big bang" reforms.
Today, six months after the big bang, after pushing and plodding with tiny diesel price hikes every month (with a month's break in-between for the Karnataka elections), guess what's the loss figure according to the Petroleum Planning and Analysis Cell? Rs 9.45 a litre.
The big bang has turned out to be a pipsqueak. We have had a 15 paise price correction in six months.
Six months of plodding efforts have been washed away, thanks to the rupee's decline. And the petroleum ministry is back to the finance ministry with a begging bowl, seeking subsidies. According to a report in The Indian Express, Petroleum Minister Veerappa Moily is seeking an additional subsidy of Rs 63,000 crore this year, which will double the budgetary allocation, in order to cover anticipated losses of Rs 1,23,192 crore.
But Moily, of course, is being too nave. The finance minister does not actually have even the Rs 65,000 crore subsidy outlay mentioned in the budget since he has used the bulk of it (Rs 45,000 crore) to pay last year's subsidies. Only Rs 20,000 crore is left.
The finance minister will be in no hurry to oblige Moily, but if push comes to shove, he will surely dip into the profits of ONGC and other oil and gas producers to pay the subsidy.
Last May, he glibly announced that he could use Rs 60,000 crore from their profits to pay out subsidies - neatly forgetting that this money is not his to apportion. It belongs to all shareholders of ONGC and other oil and gas companies.
Like a small lie that needs a hundred other lies to cover it up, the UPA's inability to raise oil prices since 2004 has resulted in the subsidy bill snowballing at periodic intervals. Energy pricing reform at a snail's pace will not do any more.
This failure is at the heart of the rupee's decline, since unadjusted oil price is what is driving the CAD higher than it needs to be. Even though oil demand is inelastic in the short run, once prices are raised substantially it makes other forms of energy - coal, gas, solar and wind - more viable. That is the bullet the UPA has to bite.
Like the proverbial frog, which dies in extremely hot water because it failed to jump out when the water was being warmed up too slowly, India's rupee is in hot water for the same reason.
The UPA opted for super-slow reforms in the one area that matters - oil pricing - and the net result has been not only a collapse of the rupee, but a widening of every possible deficit - the fiscal deficit, and the current account deficit.
Big bang should mean raising diesel prices by Rs 10 in one go.Do that, and see how the rupee reacts positively to this shock.