Falling global prices make deregulation easier
With prime minister Manmohan Singh going to look after the finance portfolio himself—meetings are on to figure out how to streamline paperwork while involving both PMEAC chairman C Rangarajan and Planning Commission deputy chairman Montek Singh Ahluwalia in major decisions—it’s not surprising many are expecting a fresh burst of reforms. Though they finally ended up just 61 points, markets rose 122 points at the day’s high on this hope. One advantage of years of policy paralysis, and not just the finance ministry’s retrogressive tax policies, of course is that even routine administrative decisions—like allowing oil PSUs to hike prices of the deregulated petrol!—are likely to be considered reforms. Immediately, the prime minister is expected to announce a hike in diesel prices. This, of course, will be in his role as prime minister; in his role as finance minister, he is expected to cut the R14.35 excise duty per litre of petrol so as to further lower petrol prices—the 14% fall in prices of the Indian crude basket also offers scope for further cuts.
The idea of matching a hike in diesel prices with a cut in petrol ones is to make it politically palatable—the middle classes who use petrol are being spared while the rich who use diesel in their SUVs aren’t being spared. While a reduction in excise duties will be unfortunate given how cash-strapped the government is, what’s important is whether diesel prices are put on an automatic adjustment path after fixing a subsidy of, say, R5 per litre. Something similar could be tried in kerosene, though with a higher subsidy of R20-25 per litre. Given how crude prices are falling, this allows oil PSUs to lower prices regularly—this is the opportunity the NDA used when it was deregulating oil prices—while giving the prime minister the credit for initiating ‘bold’ reforms.
While it is not clear what other reforms the prime/finance minister will carry out, his job has been made easier with UP chief minister Akhilesh Yadav indicating he is not opposed to FDI in retail, subject to some clarifications as to how farmers will be benefited/protected. As for other ‘policy paralysis’ issues (http://goo.gl/VvMSW), a large number of them are really routine administrative decisions—getting the $90 billion DMICDC past Cabinet or pushing in more subsidies through the Aadhar cash transfer mechanism doesn’t require any form of political consensus. So, the PM’s crack team would do well to focus on the procedural problems first. As for larger reforms—both FDI in retail and oil deregulation look a lot easier today—the PM needs to keep in mind he has a small window of opportunity before the Gujarat elections this year, and MP and Chhattisgarh elections late next year.