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Thursday, 20 September 2012 00:00
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More LPG subsidy means less food to cook on the gas

While the political dynamics of Mamata Banerjee’s exit from the UPA is fraught with danger, especially since the Samajwadi Party continues to waffle and said it would go ahead with the Bharat bandh called for by the Opposition parties today, it’s time for India’s political class to go back to Economics 101 classes. Actually, make that Maths 101, since we’re really talking of simple stuff like 2+2=4. And not just the first time around, but each time you do the exercise. That would explain to you why, even if the Congress party was to backtrack on LPG and kerosene subsidies to accommodate the mercurial Mamata, it still wouldn’t make it any more pro-people.

Before the Congress decided to cut petroleum subsidies, the under-recoveries, partly funded by the government and partly by the oil PSUs, amounted to R2,00,000 crore. Since these under-recoveries were cut by only R20,000 crore, the Congress is obviously not as anti-people as Mamata makes it out to be, but if it were to restore the subsidy, where is the money to come from? Obviously by cutting some other subsidy, say on food. 2+2=4, after all. So less gas and more food, or more gas and less food—that, in a sense, is what the political equation is. Not just for Mamata Banerjee, but for all the political parties, from the BJP to the SP, who’re opposing the government’s anti-people behaviour. To put the R1,80,000 crore in perspective, the food subsidy is R75,000 crore, pension payments R63,000 crore, education expenditure R57,000 crore, health expenditure R27,000 crore, water and sanitation R30,000 crore … Increase one subsidy and you have to cut the other. 2+2=4.

Theoretically, the government could continue with the LPG/diesel subsidy as well as those on food, education, health and what have you. After all, the only thing that gets affected then is fiscal deficit. While that sounds suspiciously close to the free lunch politicians drool over, the reason why adding to the fiscal deficit is not such a great idea is that this makes foreign investors less confident about the country’s economy and, once they withdraw money, this weakens the rupee which, sadly, makes the price of LPG go up all over again!

In an ideal situation, Mamata Banerjee should, like Congress chief ministers, give another 3 gas cylinders at subsidised rates to her state’s people. Problem is, she’s too bankrupt to do so. Sure, the state was bankrupted by the CPM but she’s gone and reintroduced regressive taxation like entry-taxes—30 firms like Tata Steel are in court over this—which further drive away investors from the state. To that extent, with Mamata out and therefore less opposition to reforms in pension, land acquisition and even Railway finances, the UPA can breathe easier and increase the pace of reform. That’s provided, of course, its new allies don’t prove to be as economically illiterate or mathematically challenged.


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