Right moves

Government should stay the course on pricing reforms

In the course of its second anniversary celebrations, the National Democratic Alliance (NDA) government sent out disquieting signals over its lack of commitment to labour reforms and privatisation. But a few decisions taken last week seem to suggest that at least with regard to following market-aligned principles in some sectors, the NDA government continues to display instincts that are reformist and respectful of the need for fiscal prudence. First, the government increased the minimum support prices or MSP for pulses and oilseeds - crops that are in dire need of some price incentives to increase domestic production and reduce imports. Then, the state-controlled oil marketing companies raised retail prices of petrol and diesel by four per cent to take them close to levels that prevailed when international crude oil prices had just begun their southward journey. The government's response in both the cases is reassuring and welcome.

The MSP for pulses have been raised by eight to nine per cent. In 2014-15, domestic production of pulses was estimated at about 17 million tonnes, an 11 per cent decline over the previous year. In order to meet higher domestic demand, therefore, imports went up from 3.6 million tonnes in 2013-14 to 4.6 million tonnes in 2014-15. Similarly, the MSP for oilseeds were raised by four-to-seven per cent to give a push to domestic output, which in 2014-15 had declined by 18 per cent to 27 million tonnes. Higher support prices should hopefully act as an incentive for farmers to grow more pulses and oilseeds, particularly when the government had sent out a clear signal about its preferences - the MSP for paddy went up by a much lower margin of four per cent. India's farmers have traditionally opted for wheat and paddy, largely because of the effective support price mechanism that has been in operation for many years. The incentive of a higher MSP for pulses and oilseeds should encourage them to grow more of these crops in preference to wheat and paddy, whose availability is hardly a problem now. However, raising support prices will not be enough. An effective purchase mechanism is also needed, so that procurement of pulses and oilseeds is easier and farmers benefit from the higher prices. The technology mission on oilseeds in the 1980s had succeeded in increasing oilseeds production through a mix of improved technology and better prices. Today, technology is not that big a constraint for farmers, but higher prices for oilseeds and pulses are and the decision to increase minimum support prices should be helpful.

In the petroleum sector, the increase in retail prices of petrol and diesel since April has been about 10 to 12 per cent. At the time the government had allowed the oil marketing companies to fix retail prices of diesel and petrol, it was feared that this freedom might be curtailed or rolled back once international crude oil prices began rising. In the last four months, the price of the Indian basket of crude oil has increased significantly and the oil marketing companies too have passed on the additional burden to consumers in the form of higher retail prices. The real test of that freedom, of course, will take place once retail prices cross the levels reached almost two years ago. The government should stand by the oil marketing companies and allow them to pass on the impact of higher international crude oil prices as its own budgetary cushion to sustain a higher subsidy bill is limited.