Govt must ride falling inflation to fully decontrol diesel prices
Feb 18 2013, 1124
It is wisely said that opportunity does not knock twice on your door, but in I the case of India, it has been knocking once too often. That is probably the reason why Indian policy makers have become complacent and proffer the same answer for every question: “Look at the long-term India growth story“. Small wonder then, the economy has been where it is today for so long, beset with slow growth, high inflation, and threatened with a rating downgrade. Adding salt to injury, exports have not grown despite a weak currency that has depreciated more than 20 per cent in the recent past. Yet, as has been the case too often, opportunity has once again returned to knocking the gates of Raisina Hill, urging policymakers to set the house in order, before global tailwinds push commodity prices up once more. The lower inflation numbers released last week, show rising prices may have been finally arrested. However, a good look at the numbers reveal that the decline may not have resulted from efficient money management by the central bank or easing of supply side constraints. Prices have mostly fallen riding a drop in industrial production. This is not a welcome change, as a drop in industrial output is advance warning of supplies drying up soon in certain sectors. Yet, given the state of the economy even eight months ago, even this fall in prices should provide a ray of hope. Policymakers must grasp this moment and initiate some aggressive change in the pace reforms, ridding themselves of the huge subsidy burden. Let's take the case of diesel pricing, with the government recently granting oil companies the freedom to raise diesel prices gradually, despite fears of its adverse impact on inflation. As you read this editorial, oilmarketing companies have hiked diesel prices by 45 paise for February, after a similar hike last month. Petrol prices too have been raised by Rs 1.50. Had the inflation numbers not fallen, many an eyebrow would have been raised by the oil companies' move. Yet, in raising prices, these companies are only pruning their under recoveries, while still bleeding from sale of subsidised diesel, even as the government and oil producing companies subsidise retailers. Perhaps, this is opportune moment for a steeper hike in diesel prices, if not a complete decontrol, as any corresponding impact on wholesale prices can only be marginal. The sooner, oil marketing companies can balance their under recoveries, the better for all stakeholders, whether the companies themselves, the government, the taxpayer or the overall economy. Complete deregulation of diesel prices may be the best way to address the subsidy issue once and for all, and certainly long before the mood sets in for the general elections next year. No matter what noises we make about prudent economic management in the run-up to the budget, which would be the last from the incumbent UPA administration, it would be so much more difficult for oil retailers to raise prices even in stages, the closer we get to the elections. No matter which political dispensation rates its chances best to rule the country in the next five years starting 2014, till then, all will be agreed to a single-point agenda of pandering to the so-called interests of the common man by artificially reining in prices of key essentials and promising to loosen the government's purse strings further, both of which will be disastrous for the economy.
The right time to settle the oil subsidy issue may be now, when circumstances, rather than economic management, seem to have lowered the burden of inflation, and the common man's expectations.