This week is going to be perhaps the most crucial for the government of the United Progressive Alliance (UPA). Not because it completes three years in office after its re-election for a second consecutive term on May 22, 2009. That, though significant in the life of any political formation in power, has almost faded into irrelevance because of the continued policy stasis that has marked much of UPA-II’s rule, plunging the Indian economy into a crisis-like situation.
The mood in the government, therefore, cannot be one of celebration over its third anniversary, but one preoccupied with concerns over the deteriorating state of the economy and what tough, remedial measures need to be taken without any delay. Adding to that mood of gloom and uncertainty is the speculation within the Congress party over who should be the next finance minister, if indeed the current finance minister, Pranab Mukherjee, is nominated to be the UPA’s candidate for the president’s election.
If expectations of action this week have risen, nobody except the UPA’s top leadership can take the blame. In June 2011, the government gave oil marketing companies the freedom to revise petrol prices in tune with the movement in international crude oil prices. Prices of diesel and cooking gas, too, were raised, though not freed from the administered pricing regime prevalent for such petroleum products. There was disappointment over the government’s reluctance to implement the recommendations from several expert committees to free diesel and cooking gas prices as well, but there was some relief that at least petrol prices became free.
However, that satisfaction was short-lived. Between June and December 2011, petrol prices were revised as many as eight times, but the government imposed an informal freeze on prices in December 2011. That freeze continues even today. Thus, prices of diesel, cooking gas and kerosene remain unchanged from what they were almost a year ago and petrol price has seen no revision since December 2011, even though international crude oil prices went up in this period, softening a bit only in the last few weeks. In spite of that, oil marketing companies’ under-recoveries have been mounting, putting more pressure on the government’s finances, since it became clear that the Rs 43,000 crore provided in the Union Budget to meet oil subsidy for the current fiscal year would not be enough.
Distressed oil marketing companies were informally told that they could raise petrol prices only when they were politically acceptable, that is, after the Assembly elections were completed by the end of February and when Parliament was not in session. And as far as diesel and cooking gas prices were concerned, these were in any case under government control. The Budget session of Parliament in 2012 began in the first week of March. This meant that oil companies had no window of opportunity to raise petrol prices. By the time the Assembly elections got over, Parliament began its Budget session. If that meant a big blow to the state-owned oil marketing companies, worse was to follow in the form of an expectation that prices could be revised after Parliament’s Budget session comes to an end on May 22.
The problem with such expectations is that any fresh delay in deciding on petroleum product prices could further dampen sentiments and reconfirm the government’s continued policy paralysis. With every passing day without an increase in petroleum product prices, the government’s credibility will take a bigger hit and the markets waiting for a positive signal on reforms from such decisions will get further depressed. This is the price UPA-II is paying for having postponed a decision that it should have taken long ago — in December, before the Election Commission had enforced the code of conduct for the Assembly elections. That procrastination has driven the Indian economy closer to a twin-deficit trap — a widening fiscal gap along with a rising current account deficit that are now reminiscent of India’s worst economic crisis in 1991.
Civil servants occupying key positions in the UPA government are now hoping that the political leadership will, at last, act firmly enough to put an end to such expectations. They also wonder why the government is not decisively pushing ahead the agenda for tax reforms like the introduction of the goods and service tax regime by initiating dialogue with at least the chief ministers of states willing to implement the new system. Let the new regime be started in at least these states and the rest should follow, as it happened in the case of the state value-added tax system, they point out.
With Mukherjee’s name doing the rounds as a UPA candidate for the president’s election, the level of expectation in North Block has acquired a new dimension. Who will be the next finance minister, if Mukherjee agrees to be the UPA’s nominee for the presidency? This week may not provide a final answer to this question, but it has certainly added to the political uncertainty that already troubles UPA-II even as it celebrates its third anniversary.