Ramifications of Diesel Price Hike: pros and cons

Today almost no one can stay immune to the ramifications of diesel price hike. No wonder it has become a media buzz and is a burning topic for discussion among the general public. Well there are two sides to every coin and similarly any move announced by the Government has its own pros and cons. But the issue becomes much more critical in the case of developing economy like ours where the major chunk of the population just survives on the threshold. The natural question that crops up in our mind is “Has the time come for India” or “Is India actually prepared for such a bold step”. India today is severely suffering the brunt of huge fiscal and current account deficits. The fiscal deficit is mainly due to the expenditure incurred by the government to artificially maintain the diesel price lower than the market determined price. It is definitely a bold step taken by the government who suddenly seems to have bestirred itself from its slumber. The reason behind this bold step can be anything ranging from fear of being downgraded by credit rating agencies to junk status or Manmohan Singh finally trying to silence his detractors. The situation when the investor confident is at its lowest, coupled with high inflation and depreciation of rupee against dollar direly needed some corrective measures and the government has tried taking the challenge head-on. For those who use common man as an excuse for their supporting baseless argument of not cutting the subsidy on diesel must understand that if we don‟t get our budget deficit in order and keep borrowing from abroad, we could hurt the common man even more by a fullfledged financial crisis. As former BJP minister Arun Shourie observed the other day, good economics makes for good politics. If parties offer good governance, which rests on good economics, there‟s a fair bet that all but the most partisan opposition voters will be enthused and extend political support. It‟s high time political parties keep their considerations of vote bank politics at bay and stop using unabashed spending as the tool to buy popular appeal. What is required of them is to ponder sincerely on measures that can stimulate and boost economic growth. It‟s natural for political parties to think of big-spending social welfare projects that they believe will return them to power, come election time. There is evidently no willingness to acknowledge that it was precisely such big-ticket public spending on illconceived projects that ran up the subsidies in the first place. The subsidy on diesel, in theory, was meant to help the farmers who rely on diesel-powered pumps to access ground water and to enable the lower sections of the society to get access to the fuel at cheaper rate, but it never really served the intended purpose. The benefits of cheap fuel were channelized more to the non deserving SUV-driving urban dwellers. So the obvious question is how does the subsidy help when it is not reaching the intended recipients and is getting exploited by those who actually do not need any kind of exemption. Thus the move to remove it is a welcome step and it is one of those rare occasions when the government has prioritized long term benefits for the economy over reckless populism and has come out of the façade of defending the aam aadmi from the vagaries of the marketplace. State-run retailers - Indian Oil Corp. (530965.BY), Bharat Petroleum Corp. (500547.BY) and Hindustan Petroleum Corp. (500104.BY) which sell these products at discounted prices and suffer revenue losses are partly compensated by the government through direct cash subsidies and partly by explorers via discounts on the crude oil they supply. The „under-recovery‟ of oil marketing companies

in 2011-2012 was 1,38,500 crore, nearly double of that in 2010-11.One may argue that „under-recovery‟ is not a loss, but even on a narrow definition the losses were well over 1,00,000 crore. Of this, the sizeable amount is borne by the government and the rest by the oil companies. The cost of depriving the latter of revenues not only meant 30% corporation tax forgone, but more importantly it cut their resources for exploration and production at home and abroad. For a country hungry for energy, for fiscal resources, and in need of the macroeconomic stability that fosters growth and opportunity, this was akin to consuming the seed grain for next year‟s crop. The Kelkar panel on fiscal consolidation has confirmed that estimates for the current year are unduly optimistic. In its view subsidies have been underestimated while tax receipts have been overestimated. As a result the fiscal deficit has been underestimated by around Rs.1,30,000 crore and the fiscal deficit-to-GDP ratio which the budget estimated at 5.1% is expected to cross 6%. The fiscal deficit may reach around 6.33% of GDP. The final ratio is likely to be considerably higher since GDP growth this year is likely to fall well short of the Budget estimate of 7.6%.Therefore the fiscal correction measures are much called for without further delay to avert the dire consequences of sky-high debt, subsidies and deficits. The government cannot plead ignorance or helplessness. The newly appointed chief economic adviser Raghuram Rajan has said much the same things and wants the government to go ahead with momentum on the reforms or policies it has undertaken. Although the government has managed to take some bold decisions and infuse some positivity into the market, the real challenge lies in the effective implementation of those policies. The optimism will fade away if the government dithers in its policies. It should not yield to the petty political dramas and stay focussed on the reforms agenda in the larger national interest. Removal of subsidies on diesel will hopefully help us get the environment for growth right and help in the revitalisation of investment from the private sector that is central to growth. The rest will then follow. There is still a long way to tread and coordinated action is needed for that. The vitiation of the political climate and the loss of civility in the discourse is a burden, but it will have to be dealt with as the trick lies in the ability to innovatively adapt.

References: The Economic Times Google news

Name of Authors: Bhavna Singh(RollNo. A054) College Name: Narsee Monjee Institute of Management Studies Couse: MBA Capital Markets Contact No.: 9167963632/96190 86092 Email Ids:
bhavna.singh26@gmail.com ashishrsharmais@gmail.com