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Over a barrel

columns Updated: Jun 13, 2010 00:09 IST

‘What’s the worst sort of government?’ I’m often asked. This week, I think, I have a clear answer. It’s a government that knows it has a problem, has identified the right solution but lacks the courage to act on it. In contrast, governments that don’t know about the problems they face can be made aware of them while those that don’t have the solutions at their fingertips can be properly advised. But a government that both recognises the problem and understands the need for a particular solution but won’t implement it is a coward.

At least in one respect, that’s true of our government today. The problem is this: if it continues to subsidise petrol, diesel, kerosene and LPG it will face a bill it cannot pay. If you assume a price of $80 per barrel for the year the total subsidy comes to Rs 98,000 crore. But the government has only budgeted for Rs 3,000 crore. That’s a gap of one and a half per cent of GDP. Even if you take into account the 3G spectrum bonanza, a hole of over 60,000 remains. If that can’t be plugged the fiscal deficit will not shrink to 5.5 per cent as Finance Minister Pranab Mukherjee promised. It could be considerably bigger.

Why is this bad news? Apart from the fact it will fuel inflation, which is already 9.5 per cent, it will also

cast doubt over India’s credit worthiness. The country’s rating could be downgraded and investors put off. Worse, it might deter domestic buyers of government bonds. And if the government can’t sell its debt it could come perilously close to default.

So what’s the solution? Simple, free petrol, diesel, kerosene and LPG so they sell at the price the government pays for them. Eliminate the subsidy and you close the hole in the government’s finances. Once the fiscal deficit looks sustainable, the country’s credit ratings will remain firm and investment will be encouraged.

If the government can’t act as decisively as that, there are other measures it could adopt. Free petrol and LPG, which the middle class use, while continuing to subsidise kerosene and diesel. Better still, limit the subsidy on the latter two to only BPL families. But, at all cost, act.

Now does the government realise the need to do this? Undoubtedly. It committed itself in the President’s Address last June. In July, Mukherjee appointed the Kirit Parekh Committee to show him how. This May, in an interview, he told me implementation was imperative.

Alas, when it comes to biting the bullet the government prefers to spit it out. That’s the message of its inability to act this week. The excuse that critical ministers could not attend the Group of Ministers (GoM) and so the decision had to be put off is unconvincing.

This is where Manmohan Singh should stand firm. I know he accepts the need to do so. Then why doesn’t he? I wonder if it’s Sonia Gandhi’s influence?

Logically speaking it can’t be fear the aam admi will revolt because the poor eponymous hero of the UPA would be the biggest loser if the government’s finances collapse. More than you and I, he needs a government that can pay its bills.

Raising the price of oil and containing the deficit may seem a conservative response to the economic predicament but, cut through the polemics and you’ll discover, it’s the best guarantee of our future. However, tough decisions are hard to sell.

In Britain, David Cameron is doing just that. In India, we’re searching for the easy way out.

The views expressed by the author are personal