Easing the price pangs

Beyond the political realm, LPG subsidy also holds takeaways for inflation management

On Tuesday, the Union government announced a subsidy of ₹200 on LPG cylinders for all customers. For beneficiaries of the Pradhan Mantri Ujjwala Yojna, the subsidies have been increased to ₹400 per cylinder. The easiest way to explain this decision is to attribute it to the onset of election season. An HT report published on August 30 clearly says that the Bharatiya Janata Party (BJP) is hoping to benefit from the move in the forthcoming state election cycle. Beyond the obvious explanation, there are three important takeaways from the government’s decision.

The Prime Minister invested a lot of personal political capital in the gradual withdrawal of LPG subsidies (Representative Photo)

First is the immediate relief on the inflation front. A Citigroup research note says that the LPG subsidies could lead to a reduction of around 30 basis points — one basis point is one-hundredth of a percentage point – in the Consumer Price Index (CPI) print in the month of September. This entails “a real possibility of Sep-23 inflation print to be slightly below 6%”, the note adds. If inflation numbers turn out as predicted by the note, it will significantly ease the pressure on the Monetary Policy Committee (MPC) to increase interest rates even if food prices continue to generate tailwinds for the benchmark inflation number. This is yet another example of a healthy coordination between monetary and fiscal policy under the current leadership.

The second key takeaway is in the realm of political economy. The reintroduction of LPG subsidies for all consumers — they were virtually abolished in the past few years — is the first policy admission by the government that inflation’s squeeze is not limited to the poor households and even the middle classes need relief. This underlines the fact that a vast majority of households remain vulnerable to a rise in prices of essential commodities and need fiscal cushion when things get really difficult. This is a sobering reality given the current exuberance around India’s inevitable march to the number three position in the global economy.

The third, and most important, takeaway is political. The Prime Minister invested a lot of personal political capital in the gradual withdrawal of LPG subsidies and the inherent message was that an aspirational India could live without these doles. The fact that his government has made a U-turn on this decision shows that the BJP remains a deeply pragmatic political party that will never sacrifice electoral interest on the altar of ideological dogma.