Steeper diesel price hike off agenda: Complacent UPA will kill growth

The United Progressive Alliance has a peculiar ability to squander all the opportunities it gets. Over the last nine years, they have demonstrated this many a time.

Then came an unprecedented rupee crisis, with the currency hitting an unimaginable 69 against the dollar. It whacked all the markets off badly. Shares tumbled and bond yields rose to five-year highs. Foreign investors started fleeing the country due to concerns about economic growth here and also on expectation that the US Fed will reduce its stimulus as the economy there revives.

Among all these there was a silver lining: a hope that the capital flight and rupee debacle will awaken the UPA out of deep slumber and force it to push the reforms agenda, which it had left incomplete after its ministers got preoccupied with one or other scam.

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[caption id=“attachment_1132619” align=“alignright” width=“380”]  Oil Minister Veerappa Moily. PTI[/caption]

And indeed there was a move in this direction. The government opened up a few more sectors. There was a sense of urgency as the ruling coalition started pushing through the unfinished businesses in Parliament.

There were right noises from even the oil ministry. Minister Veerappa Moily said diesel prices will be increased by a higher quantum than usual after the under-recoveries of the oil marketing companies started hitting record highs.

There was a dire need to contain the current account deficit and also fiscal deficit. A steeper increase in fuel prices will help the government control both. As part of the first set of reforms, the government had partially decontrolled the diesel prices as it permitted the oil companies to raise prices by 50 paise/L every month. But the fall in the rupee, which makes international oil pricier for Indian companies, and an increase in global crude oil prices rendered a 50 paise per month increase insufficient. That was the reason that got the minister worried, prompting him to make these comments.

Now, the rupee has pulled back from the life lows and there is a semblance of stability with the US Fed’s decision to defer the stimulus cut. Ideally, the government should have taken advantage of the situation to remedy the deeper malaise that has afflicted the economy. But is the UPA doing this?

Indications are it is not. What else can explain the rationale behind the partial U-turn the government has taken on its fuel price reform decisions?

According to a Business Standard report, not only has the government shelved its plans to effect a steeper increase in fuel prices, it has also plans to give away subsidised fuel to state transport undertakings (STUs).

The STUs are counted as bulk consumers and were not entitled for the subsidised diesel after the government introduced the dual pricing regime as part of its fuel reforms. State transport corporations were finding it difficult to pay up the full cost of diesel, because of the financial stress they are in.

As far as sharper price increases are concerned, he says there is no such proposal before the cabinet now at all.

Have things changed so drastically that the government can now sit back and relax? Definitely not. What we see now is just a semblance of stability. First and foremost, the Fed has only deferred its tapering. It will have to do it some time this year itself. The present party-if at all this is one-will continue only such time. Relaxing now means being complacent.

For example, take the crude oil prices. True, they have come down from the high level they had hit after the US precipitated fresh geo-political tensions in the West Asia. But they-at around $108 per barrel today-are still not in the comfortable zone for India. Also the rupee has only pulled back. It is still hovering around the uncomfortable 62.5 levels.

Add to these the concerns about the current account deficit, which has been the cornerstone for all major economic worries for the country. Here too there is a little bit of relief as gold imports are falling. It is not yet time to say whether it will stay simply because global economic recovery, which boosts the exports and thus reduces the CAD, is not yet pronounced. Fiscal deficit still remains a big concern because without a strong revival in corporate earnings you cannot expect the government’s tax revenue to get a boost.

And finally, any decision that would betray a complacency on the government’s part in setting right the fiscal situation will prompt the RBI to put off any likely rate cut indefinitely.

“More recently, as these concerns have been mitigated after steps taken by the Government and the Reserve Bank to contain the CAD and improve the environment for external financing, the focus has turned to internal determinants of the value of the rupee, primarily the fiscal deficit and domestic inflation,” the RBI had said in its recent policy review.

So the government’s fiscal situation is a concern for the central bank. If the government is not taking its fuel reforms in right earnest, it will deteriorate the government’s finances and unsettle the RBI further. The end result will be a further hit on growth.

This seems to be a likely scenario, given the complacency that is setting in.