Diesel price decontrol: Bad karma catches up with UPA govt

It requires extraordinary gall for someone who is being dragged kicking and screaming to the marketplace of ideas to claim fatuously that his actions are motivated by a high-minded desire to implement “reforms”. The UPA government’s decision overnight to begin to address the energy subsidy burden by permitting a partial decontrol of diesel prices is illustrative of such a too-clever-by-half mindset.

Thursday’s decision merely turns the clock back to 2004, when the UPA 1 government abandoned the working mechanism that the earlier NDA government had put in place in 2002 to allow oil marketing companies to tweak prices on a fortnightly basis in line with the international prices of gasoline.

In the nine years since 2004, the disastrous political expedient of fixing fuel prices in the name of protecting the poor has, if anything, compounded the burden on the overall economy and effectively driven it into the ground. Worse, even the poor have not been shielded from the wages of high inflation - as recent years of close to double-digit inflation will testify.

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[caption id=“attachment_585697” align=“alignright” width=“380”]  Memo to UPA government: You cannot escape the laws of economics. Reuters[/caption]

The epilogue of this story was well-known to anyone who has even a rudimentary understanding of economics. Engendering price distortions, in the manner that the UPA government has done since 2004, always came with the risk of bloating fuel subsidies to unsustainable levels, which in turn caused deficits to soar, which in turn fuelled the very inflation that the policy mandarins claimed to be shielding the poor from. There is no escaping the laws of economics, which work with the certitude of karmic retribution: good deeds are rewarded, and bad deeds punished.

The lesson that the UPA government ought to take away from this is that it may run, but it cannot hide, from the malefic effects of bad economics. Sooner or later, it creeps up behind you - and bites you in the posterior.The only thing you can do is to time your actions to suite your political objectives. Again, if you don’t do the right thing when the economy is in a good place, as it was in 2004, you will be compelled to do them under duress when times are bad - as they are now.

Even today, however, Petroleum Minister Veerappa Moily’s public articulations don’t convey the sense that the government has been persuaded by the economic merits of effective decontrol of diesel prices. Moily repeatedly suggested that the oil marketing companies would act “responsibly” in raising diesel prices gradually until the subsidy component is worked off. “Responsibility” is not, of course, a bad thing in itself - and of course an elected government has to be sensitive to the public mood - but far too often, it merely signals an unwillingness to bite the bullet and do the right thing.

The downside of the latest proposal, under which diesel prices will be increased by 50 paise every month until the subsidy component is worked off, is that oil marketing companies’ ability to push up prices on a monthly basis will be limited by the government’s queasiness about facing up to an incensed electorate just as it prepares for Assembly elections this year - and the big general election in the next year. In that sense, it requires the government to keep its nerve - and its head - every month for the next year and more, particularly at a time when MPs from within the Congress and its coalition partners as well as the Opposition are squawking their heads off and demanding a rollback of the price hikes. The record of the UPA 2 government, which is afraid of its own shadow, offers no compelling evidence that it has it in itself to summon up such courage.

On the other hand, the giveaways that the government announced on Thursday as a palliative - in the form of a higher ceiling on the number of subsidised LPG cylinders - will kick in with immediate effect - and will remain in force even if the government doesn’t have the political will to push through with the monthly diesel price hikes.

If the UPA 2 government’s conduct reeks of political chicanery, the response of the Opposition parties, and principally the BJP, is no less duplicitous. Already, they are responding with predictable short-sighted hysteria and demanding a higher ceiling on the subsidised LPG cylinders (which would effectively work as a cross-subsidy of the extravagant consumer by the poor) and criticising the proposed diesel price hike as “anti-people”. One expects no better of the Left parties and the Trinamool Congress, who appear to have a pathological aversion to do anything that’s right by the economy. But for the BJP, under whose watch the deregulation of fuel prices was put in place in 2002, to disingenuously disassociate itself from the Vajpayee-era reforms that put India on the high-growth path in the years after the NDA was voted out (for which the UPA government took credit) reflects cynical politics at its worst.

Between a feckless government that is half-hearted and apologetic about doing the right thing and an Opposition that is pandering to the lowest common denominator of populist politics, what chance does the economy have?