Political clock rewound; Time running out for PM-FM reforms

Three bits of news published yesterday and today confirm Reserve Bank Governor D Subbarao’s suspicion that the government’s reformist credentials are tapering off.

In fact, one can also conclude that the Congress is quickly returning to election mode and the free run given to Manmohan Singh and P Chidambaram to turn the economy around may be coming to an end.

One news relates to the LPG price rollback yesterday; today there was talk of increasing the annual cap per family to nine cylinders from six. The second is the decision to raise minimum support prices (MSPs) for rabi crops by 10-20 percent; though no price hike has been recommended in wheat by the Commission for Agricultural Costs and Prices (CACP), politicians are still rooting for a 10 percent hike.

[caption id=“attachment_513547” align=“alignleft” width=“380”] The subsidy on LPG cylinders at current prices for Indian crude is Rs 478.50. PTI[/caption]

The third news relates to a compromise solution for spectrum refarming in the 900 Mhz band , which will reduce bids for 2G auctions in the 1,800 Mhz band, and thus possibly revenues from auctions. One reason why the government could be bending over backwards to listen to all telecom lobbies is that it may need money for electioneering.

All these decisions will impact the level of fiscal consolidation achieved this year. They could also be signalling a shift in gears from the economic to the political.

Let’s take them one by one.

In what is clear economic backpedalling driven by political considerations, Petroleum Minister Veerappa Moily rolled back the Rs 26.50 hike in non-subsidised LPG cylinder prices by the oil marketing companies (OMCs). This is actually three rollbacks in one: a one-time price reversal, a change in the policy decision announced in September to let the OMCs decide the prices for non-subsidised LPG on the first of every month; and three, a 50 percent increase in LPG subsidies compared to what was planned in mid-September.

The subsidy on LPG cylinders at current prices for Indian crude is Rs 478.50; the subsidised cylinder price is around Rs 435 (for Mumbai). Add the two and you get a market price upwards of Rs 913, depending on the city you buy your LPG from.

By reversing the price hike announced on 1 November, Moily has effectively pushed OMCs into a marginal loss on even non-subsidised cylinders. It has implications for the fiscal deficit, since any loss for the OMCs has to come from the budget.

Next, consider the increase in rabi MSPs. According to Business Standard, the Cabinet Committee on Economic Affairs has okayed a hike in the MSPs of gram, masur, mustard seed, and safflower by 10-20 percent on an average for the rabi season, but it has put off a decision on the CACP’s recommendation that there should be no increase in wheat MSP. Reason: we grow more than enough wheat, and paying more means farmers will plant more wheat instead of the pulses and oilseeds we need. We are going to get higher inflation in pulses due to this.

Business Standard quotes an official of the CACP as saying: “There is absolutely noneed to further encourage planting of wheat as the country has already produced wheat in 2011-12 as required by expected demand during the terminal year of the 12th five-year plan in 2016-17.” In fact, growing more wheat would mean “letting it rot in government warehouses…” when the focus should be on “improving production and productivity of oilseeds and pulses, which we (India) import in large quantities.”

Raising wheat MSPs by, say, 10 percent, when the CACP has suggested nil, would mean boosting the food subsidy by another Rs 4,000-5,000 crore. As at the end of September, the food subsidy has already shot past the whole year’s outlay of Rs 75,000 crore to over Rs 1,00,000 crore.

In 2008, the Congress laid the foundations of sustained inflation by raising MSPs by huge margins to woo farmers. An analysis by V Kumaraswamy in Business Standard last year showed how pre-election MSP hikes caused all the damage. Wrote Kumaraswamy: “In just one year - 2008-09-MSPs of most foodgrains have been increased by 30 percent to 75 percent. The steep increase in 2008-09 could only be the result of political arithmetic with ensuing elections.”

The proposal to raise wheat MSP is yet another signal that elections are round the corner. Politics is pushing against the direction in which Chidambaram is trying to take the budget.

The third signal is the Empowered Group of Ministers’ (EGoM’s) decision on Thursday to allow incumbent telcos to retain a part of their 900 Mhz spectrum upto 2.5 Mhz even after refarming. If this becomes reality, it means Bharti, Idea and Vodafone will feel less of a need to bid for 1,800 Mhz spectrum at the auctions planned later this month.

In his fiscal consolidation roadmap announced on 29 October, Chidambaram said he expected to collect Rs 40,000 crore from spectrum auctions . Now, one cannot be sure.

The fiscal deficit is getting to be a bigger challenge that Chidambaram was willing to admit on 29 October. And by trying to oblige all telecom lobbies one way or the other, UPA-2 is in political compromise mood.

The Congress rally in Delhi today will give us a clue on whether good economics is going to be abandoned for bad politics once again.