Decontrol to control fiscal deficit
Oily issue.
By Jaydip Chakrabarti*
Despite knowing, the consequence of plausible harsh criticism to be faced in political front the UPA Government has evinced real boldness taking decision to decontrol petrol price and implemented many recommendation of Kirit Parikh Committee on rational petroleum pricing system. It was June 25, the UPA government amidst prevailing economic uncertainties, raised the prices of petroleum products and freed pricing of petrol from control. Regime of vexed administered prices and subsidy is lost and second innings of deregulation begins.
Experts immediately started to analyze the near-term and long-term impacts of deregulation and hike in price of petro-products. Shri Kaushik Basu, Chief Economic Advisor of GOI accepted that decontrol of petrol and increase in prices of Diesel, Kerosene and LPG would push WPI inflation up by 0.9% points. Based on his admission, analysts say that overall inflation is likely to be more than 11% by August. Shri Basu argued that inflation would go up sharply in near term but would come down in medium term due to fiscal consolidation. Surely, huge fiscal deficit is adding fuel to inflation.
Bringing fiscal discipline without putting a cap on welfare schemes is one of the main objectives of UPA policy makers. The message was clear and simple: look beyond any short term gain for long term sustainable prosperity. Experts are debating on the feasibility of this message. Several questions like subsidy sharing, adjustment with international price, duty are still unanswered.
Credit rating agency Crisil reveals that the move to decontrol petrol prices and hike the rates for cooking fuel and diesel will help public sector oil companies reduce their gross under-recoveries by Rs 25,000 crore in FY2010-11. Before the hike, Crisil says, the oil PSUs were projected to lose Rs 74,300 crore on selling petrol, diesel, domestic LPG and kerosene below cost in FY2010-11. The Government is banking on these figures and better-than-expected revenues from 3G WBA spectrum auctions to bring down the fiscal deficit at comfortable level and also pull down inflation at a significantly lower level. In fact, armed with this set of information, the policy makers of the UPA Government are trying to justify the move to decontrol petrol.
Decontrol will open markets for private oil companies. Moreover, PSUs are expecting that cash flow will be increased which, in turn, will boost investment capacity of PSUs. Shri Ashok Sinha, Chairman and MD, Bharat Petroleum Corporation Limited (BPCL) said that deregulation of auto fuel prices had been a timely move as it would ensure enough cash flow for public sector oil companies to invest in infrastructure. Shri Sinha’s comment bears a lot of importance. For improved distribution network, PSUs need to focus on better and more efficient infrastructure. Present state of infrastructure needs to be revived.
It may be noted that the Prime Minister Dr. Manmohan Singh suggested international leaders in G-20 to withdraw financial stimuli only in a well-planned manner. Sudden withdrawal of subsidies and other benefits may result in deflation. No doubt, the move to deregulate petrol price is well calibrated. To attain a sustainable double-digit growth, it is necessary to consolidate fiscal system without hampering growth.
Further, India is emerging as a major global player and actively involved with various multilateral organizations. India is also playing a crucial role in evolving climate protocols. Naturally, it will be unwise to overlook the emerging concept of pricing of fossil fuels, which calls for rationalization of fossil fuels pricing.
However, it is undeniable that any hike in prices is demand compressing. The extent of demand contraction should be kept at minimum level so that growth process is not adversely affected. In this context, policy makers seem to be convinced that huge government spending on social security schemes led to a satisfactory rise in household incomes across rural India . Policy makers also believe that rural incomes have risen faster than the rate of inflation, thereby protecting real incomes adequately. Consequently, there exists minimum chance of demand contraction in a large degree.
No doubt, any roll back on social front now will cause a significant drop in demand resulting recession. Welfare schemes covering the rural people are necessary vehicles to prevent any fall in rural demand. Good monsoon is expected to remove the supply side constraints. The UPA Government needs to strengthen the Public Distribution system (PDS) and successful implementation of proposed food security legislation to prevent any demand side disturbances. To protect the poorer section of rural India from bad consequences of deregulation of petrol prices and hike in other fuels, UPA government needs to augment existing social security programs for uninterrupted inclusive growth.
About the author: Jaydip is a freelance journalist from Tripura and has been writing for ezines and several websites. He also contributes regularly to Press Information Bureau, Agartala. You may contact him at jaydipsoma[at]gmail.com
