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A slick suggestion

india Updated: Aug 18, 2006 03:57 IST

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Will it be $70 a barrel? Or $ 60? Or $ 100? It is time to stop speculating on global prices of crude. However hard bureaucrats, economists or speculators may try, the simple fact is that global energy prices are not easy to predict. Prime Minister Manmohan Singh’s broad hints from the ramparts of the Red Fort on Independence Day that subsidies cannot forever support cooking gas and kerosene prices is a somewhat belated admission of this. At current levels, the government is only tinkering with petro product prices. With Left parties as key allies, the government faces the double whammy of supping with the Left and worrying about the cascading effects of a hike in diesel prices, which has an inflationary potential. But government can’t adopt an ostrich-like policy. Sooner,  rather than later, the government has to deal with the inexorable rise in oil prices.

We can dwell here on the nuances of the oil bonds that the government gives to State-controlled petroleum companies to keep retail prices low. Or on the importance of giving oil marketing companies the freedom to adjust retail prices within limits. Those are not real solutions. The real issue lies in accepting that liberalisation has resulted in private refining companies that suffer along with bleeding State companies, if prices are not freed up. India must accept a globalised framework of energy prices if its growth ambitions of catching up with China are to make sense.

So here’s the real question: who is going to bell the cat? And how? Here’s a hint: the US Federal Reserve Board. The Fed has done a remarkable job of managing inflation and growth, and balancing the two in the world’s most important economy by systematically raising the benchmark interest rate for the banking system. For 17 straight quarters, it raised the rate in small doses and finally paused this month. The Fed’s open market committee meets every six weeks to fix interest rates; India could consider an analogous panel for adjusting its oil prices. Depending on market conditions and the prevailing level of inflation, the committee could raise, hold or cut them. The administered price regime is an anachronism whose time is clearly past. The government needs to think through more innovative processes if it is to implement its reformist programmes.

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