Finance Minister P Chidambaram’s job is not exactly easy — and it shows in the way he has to resist all sorts of pressures while he strives to achieve what could be termed as the nearly impossible trinity of fiscal control, reasonable inflation and high economic growth. The government’s decision this week to increase the retail prices of petrol and diesel by Rs 2 and Re 1 per litre respectively is expected to reduce the revenue loss of public sector petroleum marketing companies by Rs 840 crore in the remaining six weeks of the current fiscal year. That is minuscule compared with the overall figure for the year, estimated at Rs 71,800 crore. The government has been time and again issuing bonds to these companies in its I-owe-you mode to effectively subsidise petroleum prices. Though originally intended to keep kerosene prices affordable for the poor, the wholesale subsidisation of petrol and diesel has made the whole thing a freebie even for affluent sections of society.
It is ironic that the Left parties supporting the UPA government continue to be a party to this reckless subsidisation, ostensibly in its attempts to keep prices under check for the underprivileged. Inflation based on wholesale prices is at around 4 per cent again, and given the undercurrent of a further price hike some time in the future in view of Indian petroleum product prices being way below global levels, perhaps one cannot blame the Reserve Bank for holding its horses on cutting interest rates. That is not good news for industrialists, who cannot hope to get loans at much cheaper rates as long as there is an atmosphere of simmering inflation. It is pertinent to note that under-recoveries from under-priced petroleum products would have been even higher at Rs 90,000 crore were it not for a rise in the rupee that makes imports cheaper, and also on account of more efficient refining margins. It is abundantly clear, therefore, that an endless supply of oil bonds is not the right way to tackle the mess. Since the burden of under-pricing is only partly shared by the government, state-run oil companies face the danger of falling financially sick if the current condition is allowed to persist. The government needs to release in regular doses the pent-up costs of high global oil prices, and both the Left and industrialists must aid the process. For the Left, it is important to realise that a healthy fiscal situation is necessary to fund social sector programmes, and for industrialists, it is key to know that sustainable growth cannot take place in an atmosphere of fiscal profligacy.
Given that the next budget would head into an election year mood, perhaps it is too much to ask the government to bite the bullet on oil prices right away. An easier way could be for the UPA to take opposition parties into confidence and arrive at a quiet consensus with them on how to go about passing on the burden of high global oil prices to consumers. Casual subsidisation will only cause equally unmindful consumption behaviour. If the current hump is crossed somehow, even benign interest rates could become sustainable and the ‘India growth story’ would then be on firm ground.