Rocket fuel

New Delhi must stand its ground on subsidy cuts

A 14 per cent hike in the price of diesel may be the beginning of India's long-awaited economic reforms. Now it needs to stay the course. A shift in public spending from consumption to investment is the ultimate goal.

The Congress Party-led government has waited for too long to give the economy a kick-start. GDP growth slowed to a 5.5 per cent annual rate in the June quarter, near its slowest rate in three years. International credit rating agencies have threatened to downgrade the sovereign's debt to junk status over New Delhi's policy paralysis.

In practice, then, there was little choice but to do the right thing, even in the face of strong public and political opposition. However, the Rs 5 per litre increase in the price of diesel will only cut the treasury's $36 billion fuel subsidy bill by 10 per cent. And the price of diesel at the pump would remain remarkably low by international standards, 40 per cent of the UK level. However necessary and however small this move, there is tremendous political pressure to back down, not least from within the government. A reversal would be disastrous, cementing Delhi's reputation for spinelessness.

The problem is fundamental. The fuel subsidies are presented as pro-poor, but are actually a goody for the middles classes. Such programmes divert public money from essential investment in health and education. After all, India has the world's highest rate of child mortality according to a report from UNICEF on September 13. And its schools recently ranked second to last among 73 countries that participated in the Programme for International Student Assessment, conducted by the OECD. India spends 10 per cent of its GDP on fuel, food and fertiliser subsidies as compared to a lowly 3.8 per cent on education.

Instead of a reversal, the government should move faster. The cabinet is meeting today to discuss further reforms, perhaps including a liberalisation of rules on foreign direct investment in aviation. With less than two years to go before a general election, it would be wise to bunch together as many reforms as possible - not drag them out, or worse, keep them on the shelf.