Friday, February 19, 2010

Lift me up....


Indian economy, it appears, is recovering from the grueling financial crisis witnessed by the whole world prodding the government of the day to defuse the mayhem and chaos that accompanied it. The outcome has yielded results and has fuelled the debate about withdrawal of stimulus package. For, many economists feel its time for fiscal consolidation- an euphemism to warn ourselves of the ballooning fiscal deficit which touched a 15-year high last year. One measure that is suggested is to curtail our huge subsidy bill which no doubt fills the ballot boxes in favor of the government,

Well, when it comes to subsidy the first thing that comes to my mind is fuel subsidy though it is only a off-budget item and does not reflect in the revenue or fiscal deficit of the government. Fuel subsidy – everybody gets it. From the fuel- guzzling SUV owners, millionaire owners of the luxury cars to a moped owner who has no idea what to do with that moped that has 30km/h top speed. The point in case is the recent recommendations made by the Kirith Parekh committee on fuel pricing. Among all other things, the committee has recommended the free pricing of petrol and diesel. And not to be forgotten that the same measure has been recommended by committees formed previously.

But this time government is seriously mulling over it. Though, it definitely has kicked up a lot of smoke in the air. If this is implemented it would be an audacious reform that would make India get closer to being a truly free market economy. One reason this is hugely protested is for the apprehension that this might throw the Fuel price vulnerable to fluctuations in global fuel price. This fear of inflation has been the restraint so far. In my opinion, this is only an ill-informed conclusion. Its only the existing system of subsidy will lead to generalized price rise. As government has to bear the loss of Oil marketing companies by way of borrowing it has the impact on borrowing cost for the manufacturing sector which will pass on the cost only to the consumer. But by having a free pricing RBI can have a better control over controlling inflation through its monetary measure.

And as such the free pricing would not have great impact on the spending pattern of the vehicle owners. But one thing is for sure if this is implemented fuel pricing can no more be a political decision in the future to come. Rest assured for ruling party that opposition parties would have one ammo less in the artillery.

Of course, the decision of decontrolling fuel pricing takes lot of political will and takes lot of work convincing the people of its long term benefits. Till then its just wait and watch.


Here’s good write-up on the issue by Kirit.S.parikh
http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=TOINEW&BaseHref=CAP/2010/02/18&PageLabel=14&EntityId=Ar01400&ViewMode=HTML&GZ=T