Sunday, June 27, 2010

Will price hike fuel Congress populism? (June 27, 2010)

By Swpan Dsgupta

To those who read much into the timing of announcements, there may be reasons to believe that the Government decision to completely deregulate petrol prices and lower the subsidy burden on diesel, kerosene and LPG was linked to the Prime Minister’s presence at the G-20 summit in Toronto this week. With a controversy raging between Britain and Germany on the one hand and the US on the other over the validity of sops to tackle the global economic downturn, the Indian decision could well be read as a thumbs-up to the Europeans. With a lesser tax burden than developed countries and the fiscal deficit expected to come down to 4.5 per cent of the GDP once the impact of the price hikes and the 3G auction money are felt on the exchequer, India, Manmohan Singh can legitimately hope, will once again become the acknowledged flavour of the season for Western democracies and Japan.

That the price increases, which are likely to add about 0.9 per cent to the general inflation and raise interest rates, may have a bearing on the competitiveness of Indian manufacturing and services is, however, incidental to the domestic fallout. Even before the Kirit Parekh recommendations proposing the dismantling of the administered prices mechanism for petroleum, the Government already had two other endorsements of the move, one by C Rangarajan and the other by BK Chaturvedi. The UPA could even cite the hesitant moves in this direction by the previous NDA regime — although in their case, sensible economics was offset by a publicity-hungry Minister who insisted on owning up to every price fluctuation and the greed of party apparatchiks for petrol pump allotments.

Whatever the intellectual justifications, the fact that the Government actually took the plunge indicates an enhanced sense of political self-confidence. It is now becoming clear that the Congress feels that inflation and particularly the rising prices of food are unlikely to disrupt the political equilibrium. A section of the middle class, particularly those employed by the private sector, will feel the pinch the most but public sector employees with inflation-linked incomes are not going to be materially affected. Moreover, with the BJP and the Left struggling to find a focus, the UPA calculation that the price hike poses no political threat to the regime seems well founded. Mamata Banerjee will, no doubt, register her displeasure but is unlikely to do anything precipitate.

For the country, the Government’s bold move to let the market dictate petrol prices — which implies that prices could also come down — and cut other subsidies is a mixed blessing. On the positive side, the reduction of the fiscal deficit implies more money in the market for the private sector to undertake meaningful investment. At the same time, the rise in interest rates means that companies will have to be extra efficient to remain competitive in a global environment. Indian interest rates are scandalously high and one of the reasons for this is the complete detachment of decision-makers from the productive sector. This is a long-term problem and a legacy of the bad, old socialist days when it was felt that economics was all about drawing up grandiose plans that invariably remained confined to paper and the Left imagination.

The danger of elaborate mega schemes neutralising the positive gains from last Friday’s announcement cannot be discounted. It is almost certain that there will be political adventurers insisting that the removal of one set of subsidies should be accompanied by a new set of subsidies, something that is politically better targeted and not so diffused. The victory of Manmohan Singh and Pranab Mukherjee in the empowered Ministerial committee doesn’t imply that they have won the larger battle in the Congress.

It is worth remembering that the other power centre in the Congress is still governed by the principles of socialist paternalism. Encouraged by what they regard as the ‘success’ of the NREGS, there is an inclination to enter into a never-ending spiral of welfare handouts. Sonia Gandhi has never articulated her political philosophy with any degree of coherence — as of date her collected political reflections are likely to be accommodated in a slim volume. However, her revealed preferences, actions and the type of people she has nominated to the National Advisory Council suggest an inclination to convert Indian public life to a series of entitlements. Will the savings on fuel subsidies be diverted to other areas which yield direct political dividends?

This is not an academic issue. With the Obama Administration insisting that the world economy could still do with Keynesian sops — an approach that is sharply divergent from the fiscal prudence being pursued by Britain and Germany — there will be a section in India that will insist that this is no time to get obsessive about the fiscal deficit. They are likely to press the point that there is no compelling need to rush things and bring the deficit down from the planned 5.5 per cent of the GDP to 4.5 per cent by 2011.

The tussle between a Prime Minister and Finance Minister looking to enhance India’s competitive edge and a Congress president who is inclined to populist measures that are inherently wasteful and inefficient hasn’t erupted into the open. The public reaction to the fuel price hike could bring this tension out into the open.

The Opposition parties are faced with a curious dilemma. If their agitation against last Friday’s measures does elicit a significant public response, there will be pressure on the Government to either roll back or divert the savings into a NAC-inspired project. Ironically, the Opposition’s success will strengthen the hands of Sonia Gandhi vis-à-vis a Prime Minister who seems increasingly intent on carving out a name for himself in history. Politics, it would seem, does end up making strange bedfellows.

Sunday Pioneer, June 27, 2010

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