Petrol On Fire

In all fairness, the government shouldn't be blamed for policy paralysis. They have acted with such alacrity. Petrol prices were hiked by Rs 7.5 per litre as soon as Parliament went into recess. So, no shouting brigades, no loud thumping of desks, no rushing into the well of the House, no hectoring or haranguing, and no "pliss-pliss". Good only, no?

Actually, the petrol price increase raises two other issues. One, we can expect to finally see the extent of the increase pared down by Rs 2-3 per litre. The protests from allies has already started acquiring a high decibel level. By Wednesday evening, both Mamata Banerjee and Karunanidhi had voiced their displeasure over the increase. SP's Mulayam Singh Yadav, who is being courted assiduously by Congress as a counter-weight to Didi, also expressed his opposition to the price hike. Ditto for RJD's Laloo Prasad Yadav. So, once all these protests reach a crescendo, and acquire some kind of a shrill heft, we might expect to see the Congress top brass relenting and "rolling back" the hike partially. My bet? By Rs 2-3 per litre.

Even The Economic Times is betting that the price rise might finally be tempered somewhat (read here), though for a different reason. Their take: oil prices in the Singapore bulk market have been cooling off a bit.

But, ironically, BJP and CPI(M) have been misleading the public from every forum. By the way, isn't it strange how the right and left get into bed conveniently when they want to squeeze out the centre? Their beef: petrol price hike has a cascading effect and is likely to have a spiralling impact on inflation. That's a load of nonsense. Here's why. Petrol has a negligible weightage (1.09%) in the wholesale price index and its ability, therefore, to bump up headline inflation remains marginal. Also, bulk goods movement --such as essential commodities -- are moved by modes of transport that use diesel as fuel (think trucks) and not petrol.

Are there any reasons to protest against the petrol price increase? Of course, shiploads of reasons to crib about the price rise, but certainly not on account of its impact on headline inflation. The current hike comes on top of the existing inflationary pressures weighing down the middle class. And, this current episode of high inflation and inflationary expectations has its roots in the survival strategy crafted by the government in the aftermath of the 2008 global financial freeze, but let it stay on for far too long. In short, this lifeline to the economy should have been withdrawn much earlier. Plus, of course, the government has been loath to either cut down on wasteful subsidies, or re-align its expenditure strategy which is actually ending up further fuelling inflation. And, let's not even get started on this business about governance deficit. So, of course there's plenty to cry about, but not because a petrol price increase will lead to inflationary pressures as the voices from the right and left are asserting.

The government should have increased prices of diesel along with petrol prices if it really wanted to bring down the current account deficit and stabilise the rupee value. A diesel price hike might certainly be seen as inflationary, but at least these high prices would've curbed demand for the commodity. In return, it might have squeezed the import bill a bit, checked the runaway current account deficit and pulled up the falling rupee.

It is well known that fuel prices needed to be increased, and even the Reserve Bank governor's statements have alluded to the fact about how domestic fuel prices lagging international prices does lead to a build-up of inflationary expectations.

But, guess why diesel prices cannot be increased immediately, though news reports suggest the government will be meeting tomorrow to consider the possibility? The answer: it's summer in this part of the world and, with kharif sowing to begin soon (in the next 30-45 days), pols can't afford to get farmers cross about high diesel prices. In many parts of the country, farmers will need to run their pumps at full tilt, even though we've been told to expect a normal monsoon.

If there was any reason to carp, the grouse should have been why the government didn't spend on improving irrigation infrastructure in the 60 years since Independence. And guess what MPs and MLAs are mostly concerned about? Getting a red beacon on their cars!

Budget Badinage

First, my sincere apologies to all readers. Travel schedules and attempts to understand the vagaries of my new daytime job have kept me slightly busy. Promise to be more regular in the future.

The approaching Budget and speculation about its format is occupying the minds of most market observers. That is not surprising. Given the mandate won by this government, everybody is keen to see what form and shape this budget takes. Everybody also has his pet hypothesis. So, as all eyes converge on Pranab Mukerjee, here is this column’s take on the Budget (which is a bit of my own loud thinking and a bit of mish-mash from all that’s appeared so far in the media).

First, the man himself. Pranab Mukherjee is a seasoned politician and not an “economic technocrat”. This is sure to reflect in the Budget. Those hoping for a reforms blitzkrieg may be in for some nasty shocks. Those hoping for a totally populist budget without any market-friendly giveaways may also have got it wrong. The answer might lie in the way the political landscape has shifted.

First, the FM has to mend the gaping hole in the fisc. 'We have to deliberate on ways and means to bring back the economy to higher growth trajectory without fiscal profligacy,' Mr Mukherjee is believed to have told a conference of state ministers. So, out with all hopes of heavy tax cuts. Any substantial tax cuts would have to be substituted with increases in indirect tax rates, an utterly undesirable proposition. But, there are likely to be some tax changes – such as, some tinkering with Fringe Benefit Tax or Securities Transaction Tax which leave an okay taste in the mouth without upsetting the consolidation process.

He may also look at some new tax exemption schemes on a prospective basis to keep the household spending engine on track. Increasing the threshold level for tax breaks on interest paid for new home loans is something that’s already figured in the media. More of such similar schemes might worm their way into the document.

But, he also has to think of the forthcoming assembly elections in some of the states, such as Maharashtra. Therefore, food guarantee programmes, higher procurement prices for rice and other such schemes might find mention in the Budget document. Plus, given the way this monsoon is behaving, Mr Mukherjee might be forced to provide some rural handouts and concessions.

Think state-wise, especially about states that are likely to go to the polls in the next couple of years, when you read the Budget document. The Congress party, emboldened by its improved performance in Uttar Pradesh and some other states where it had reached rock-bottom, will want to consolidate its hold in many states before its current allies (Mamata or Karunanidhi) get too strong or some of the existing political opponents can regroup. See how quickly CBI has acted in arresting NCP man Padamsinh Patil. Or, witness the alacrity with which the Kerala governor has acted against Pinarayi Vijayan, supposed to be close to Prakash Karat. That should provide some clues about not only the shape of politics to come but also hold some pointers to the nature of this year’s Budget document.