This is a dilemma all governments have to confront one time or the other in their tenures: How to balance shrill demands of populism against the needs of fiscal discipline. The case in hand is the recent reduction of Rs 2.50 per litre in the pump price of petrol. Of this, the Centre will pick up the tab for the cut of Rs 1.50 per litre while the oil marketing companies will have to bear the cost of Re one per litre. The decision did not satisfy any one of the actors in play. Nonetheless, the people at large found it a classic case of too little, too late. What was a mere cut of Rs 2.50 when the retail price of petrol was hovering close to Rs 90 a litre, they asked. The economists and the oil marketing companies had their own reasons to be unhappy.
One, they will have to incur huge losses on account of the cut. This was reflected in the sharp reaction of the markets which pushed down the share price of all oil marketing companies immediately after the announcement. The Government attracted criticism from economic experts and market men who were concerned that the revenue loss of Rs 11,000 crores in six months due to the Rs 1.50 per litre reduction in the price of petrol would further pressure the fisc. The Government was caught in a no-win situation.
Particularly when the relief of Rs 2.50 per litre was nearly wiped out a couple of days later when there was a further spurt in the global crude prices. Let us face it. The Modi Government showed a loss of nerve by its knee-jerk reaction. We know like all opposition parties, it was under relentless attack for the fuel prices hitting record highs. Parties in the opposition are known to show little appreciation of the economic realities; instead giving priority to partisanship to score brownie points against the ruling dispensation.
In this regard, the Congress was no different, berating the Government daily for the high petrol prices. But the people and the media, in sharp contrast, by and large reacted responsibly, not whipping up popular passions on account of high fuel prices. The Government needed to stay the course. Because the pressure on the fisc would eventually inflict more harm on the economy, and thus, on the common man than the relief a paltry cut of Rs 2.50 a litre would provide.
As it is, keeping the fiscal deficit within the targeted 3.3 per cent of the GDP is proving difficult. There are several reasons for this. One, the global crude price spurt, of course. The end of the US Fed’s tapering programme and instead a steady increase in the bank rate. This has led foreign investors and funds to pull out of the Indian securities markets and exploit the higher interests rates in the US. Also, the sharp depreciation in the currency would result in higher outgo for imports, which, in turn would have an adverse impact on not only crude prices but a host of industries reliant on imports.
The target for current account deficit has already been revised upwards by the finance ministry but it is unlikely that it would be able to maintain it even at the higher 2.6 per cent level of the GDP. Credit rating agencies are quick to assess the broad parameters of a national economy such as the twin deficits to review sovereign credit ratings. A downward revision can make foreign funds costlier for a whole host of industries. Besides, the sharp drop in the value of the currency would make repayment of dollar credit costlier. The precarious fiscal and current account situation, meanwhile, has led the central bank to adopt a cautious approach. Belying expectations of markets, the Monetary Policy Committee at its last meeting, kept the basic rate unchanged and hinted at a calibrated tightening stance.
Clearly, inflationary pressures were building up in the economy, though currently it was well within the prescribed parameters. Under the circumstances, the need to maintain fiscal prudence even under pressure is the only sensible course. In the election year, there will be enormous pressures to boost spending but this should be avoided for the sake of a healthy economy. Modi is known to be a strong leader. He should not waver on adhering to the fundamentals of the economic situation.
–Editorial
