Unnecessary reversal

Diesel price hikes should not have been put on hold

The petroleum ministry's decision to stop the regular monthly increases in diesel prices should be seen as a setback to the fiscal consolidation process that the finance ministry has been assiduously nurturing over the past several months. Small as the monthly increments were, their regularity provided some comfort to sceptical observers of the fiscal situation. Further, after the first hike, the political resistance has been strikingly non-existent. There was an initial glimmer of worry some weeks ago when a scheduled hike was put off because Parliament was in session; this was eventually done when the recess began. This time around, some other aspects of the decision raise somewhat more significant issues.

The Karnataka elections are less than a week away. The petroleum minister represents Karnataka in the Lok Sabha. The question will legitimately arise as to whether these things have anything to do with the decision to stop the price increases. Even if this is only a matter of perception, it brings narrow political considerations back into a process that appeared to be shedding these and moving into the purely technical realm. And what happens if, as some opinion polls suggest, the Congress is to form the government in the state? Is interference with diesel prices going to be seen as a legitimate electoral instrument, what with four other states going into elections later this year?

The fact is that the size of the fuel subsidy bill has become such an economic liability that every political party recognises its vulnerability to it. If parties in opposition today were to form the government after the 2014 elections, they would have to deal with the problem in exactly the same way as the United Progressive Alliance is doing now. Ironically, the greater the probability of this happening, the less the likelihood of the current Opposition parties resisting price corrections today. This is essentially what accounts for the political space that the government has found to carry out these hikes. Sooner or later, the gap will narrow enough to consider effective deregulation of prices. All this is being countered by the decision to stop the hikes, both in terms of impact and credibility of commitment.

As long as crude oil prices were falling, there was an understandable temptation to take advantage of the consequent decline in the subsidy bill. But recent patterns suggest that the persistence of the price decline clearly cannot be taken for granted. Prices have edged back up and it is anybody's guess as to where they will finally settle. As long as this uncertainty remains, it is prudent for the government to persist with the incremental price increases that were clearly working. Holding even this modest reformist measure hostage to political calculations, if that is indeed the case, smacks of opportunism, or worse, desperation.