The Integrated Energy Policy of the Expert Committee under Kirit Parekh in 2005 stated that “The energy policy should reliably meet the demand for energy services of all sectors at competitive prices. Further, lifeline energy needs of all households must be met even if that entails directed subsidies to vulnerable households.”
The government fixes the rates of LPG (domestic cooking gas), PDS kerosene and diesel which are considered to be the lifeline energy sources of a majority of the population in India. So state-run oil marketing companies like Indian Oil Company (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) sell these products at prices that are way below the market price. The difference between the retail sale price and market rates called ‘under-recoveries’ is provided by the government. Out of the Rs.45,580 crores set aside as oil subsidies this fiscal, it is estimated that around Rs.40,000 crore will be spent on under-recoveries (Times of India, Sept 15). Now this is assuming crude oil prices will be relatively stable which is a big ask especially considering the impending crisis of democracy in most Arab nations and also considering the fact that we import 80% of our crude oil requirement.
Since April, the government and RBI both have made a shift in stance towards cutting the fiscal deficit from reining in inflation. In June 2012, the then FM Pranab Mukherjee announced the steepest hike in petrol prices ever by Rs.7.54 per litre. Petrol prices were decontrolled two years prior to this huge hike. But a lack of political will and populism on the part of the UPA government left the prices untouched. This is where the NDA government played their cards right when they were in power. During the six years of their rule, they hiked fuel prices 33 times. But the NDA regime never saw protests of the magnitude that we witnessed when the fuel price hike was announced because they gradually raised prices so that the common man could absorb the effects instead of producing a shock through one humongous hike. This is where good economics and politics need to go hand in hand. In spite of the shock, the hike created the necessary fiscal space for RBI to cut the repo rate for the first time in three years that released more liquidity into the economy to curb the fiscal deficit at 5.1% of the GDP. The impending doom of a ratings downgrade to junk status by international credit-ratings agency Standard and Poor is what is forcing policy makers to take a spate of measures in recent weeks that have been termed as ‘reforms’ to encourage investment from abroad including the setting up of a ‘National Investment Board’ to speed up clearances of FDI proposals in the newly opened up multi-brand retail, insurance and airline markets. These so-called reforms can only churn excitement in the speculative markets which finds investors in a whopping 3% of the population of India. In order to raise infrastructural quality in this country, investments have to be made in the eight core industries: coal, crude oil, cement, electricity, fertilizer, refinery production and steel.
Most recently, Chidambaram mentioned how the UPA supports deregulation of diesel prices ‘in-principle’. But it is political suicide even if they can pull it off without upsetting any of their allies and the opposition. Most of poor India or the UPA’s favourite cuss word the aam aadmi uses diesel and deregulating it will raise prices by around Rs 14.29 per litre (according to ET) which is not a small increase by any measure. With many of the south western and north western regions suffering from acute rain deficits, a 50% subsidy on diesel had to be given to ensure irrigation and save standing crops. The problem that arises with a subsidy system is that there are many rich farmers in the group that also become beneficiaries and sometimes at the behest of the landless ones especially in states like Maharashtra, Gujarat, Haryana and Punjab where they have political clout. The beneficiaries also include those who drive various luxury cars and SUVs.
Same is the case with PDS kerosene which according to a NCAER study, 18% of it is used for non-household purposes. One wonders how much of this leakage can be plugged by measures like introducing a Unique Identification Number which by the way, was not officially put to vote in Parliament, but billions are already being spent on it.
The Deputy Chairman of the Planning Commission time and again re-iterates the necessity of an 8% growth rate and containing subsidies below 2% of GDP. As of October 21, the rupee has appreciated against the dollar to a one-month high of Rs.53.83 while the crude oil prices have also reduced by around 22.4% since last month to $90.60 per barrel (Bloomberg Stats). These along with measures to discourage import of gold could very well reduce our current account deficit to tolerable levels.
One can only gape at the policy makers when they say exposing a majority of our fragile population to the tumult of the international markets is the way forward. The prevailing ideology in the world is that of free markets. But in this post-industrialization era of rapidly depleting natural resources, changing climates and increasing inequality, is growth fetishism the solution? A wise man I know once referred to socialism as ‘sharing poverty’ and I believed in him. I am a 90s child who grew up watching India shine. But when I see the absolute number of poor and dollar billionaires increase at the same time, I am forced to think that there is a fundamental flaw in the growth story. There’s not a single economist in the world who seem to know what he’s talking about. Most economists are defined by their politics when it should be the politicians who should be recognized for their economics.