The overdue diesel hike

Whatever govt's worries, time for higher prices is now

Almost unnoticed, the price of a barrel of Brent crude has crept back up past $105. A few weeks ago, it had dipped below $80. Since then, it has risen with hopes about the global economy. China-watchers expect stepped-up investment in preparation for the Thirteenth Party Congress later this year; it is believed that the US Federal Reserve might be considering a third round of quantitative easing; and the chairman of the European Central Bank, Mario Draghi, said on Thursday that it would do “whatever necessary” to preserve the euro zone. But good news for the global economy is, in one way, bad news for India. It has dashed hopes that the fiscal impact of subsidies on diesel and liquefied petroleum gas (LPG) for domestic use would be reduced by softening world oil prices. A diesel price hike cannot, now, be further postponed.

It is important to remember that the Budget for 2012-13 capped the amount the government can spend on fuel subsidies at about Rs 40,000 crore. Extrapolating from last year’s spending, that amount is burned through by less than three months of under-recoveries on diesel, kerosene and LPG. This year, in fact, things might be worse, given the depreciation of the rupee. Paying $105 a barrel with INR-USD at 56 means that a barrel is Rs 5880. Last year, even when crude was at $120 a barrel, an exchange of 47 meant a barrel cost Rs 5640. The chances of meeting the Budget’s rupee estimates — reportedly calculated with crude at $110 a barrel, and the exchange rate at Rs 50 to a dollar — look unlikely. And yet, the government faces a giant loss of credibility if it fails to meet the only real fiscal target it set for itself.

Even besides the increasingly apparent underestimation of fuel subsidy, other aspects of the Budget numbers look ever more dicey. An estimated receipt of Rs 30,000 crore from disinvestment seems impossible, given that the government cannot even privatise Scooters India in Lucknow. And the timing and amount of fees from spectrum licensing are both still doubtful. The fiscal deficit is Budgeted at 5.1 per cent of gross domestic product. If GDP targets are missed following a poor monsoon, and spectrum and disinvestment bring in much less than expected, then there is no option left but to control expenditure if the fiscal deficit is not to balloon to uncontrollable amounts. It is already dangerously high by international standards. Were it to come in over estimates by a percentage point or more, the effect might be inflationary. The very short-term positive effect on inflation that comes from not raising diesel prices cannot be considered to be worth the considerable political and economic damage that higher inflation in the medium and long term would cause. The government is understandably worried that farmers, already hit by a bad monsoon, will be further hit if the diesel that powers their pump gensets becomes more expensive. Other, more targeted methods, will have to be devised to ease agrarian distress.