India Insight

Bold move on diesel, but hold the rollback

September 14, 2012

Sometimes the government does what it promises. India raised diesel prices by 5 rupees per litre on Thursday in a move guaranteed to alienate the common man, but please foreign investors, oil marketing companies and ratings agencies.

Opposition parties and key government ally Mamata Banerjee expressed their expected disappointment with the decision. The BJP called it a “cruel joke” and “mortal blow,” while West Bengal Chief Minister Banerjee planned a street rally on Saturday and said she was “shocked“.

So… on with the protests and demands to lower the prices. But let’s think for a minute about why that might be the wrong thing to ask for.

Diesel accounts for more than 40 percent of India’s refined fuel consumption, and there is no doubt that this move will hurt farmers, commuters, businesses, inflation and the common man in the near term. But sometimes, governments must make hard decisions that threaten the popularity of its ruling politicians.

The economy is slowing, the fiscal deficit is ballooning and no country wants its debt downgraded. If raising the price of diesel tells the world that India is serious about fixing its economy, rolling back the price would tell everyone that it’s not.

The Congress-led government must decide whether it prefers political longevity by the power of the ballot box, or whether it’s willing to burnish its long-term reputation by taking steps to fix the economy in ways that could threaten its leadership. Opting for the latter is a bold move — it will be harder for some people to afford to fill their vehicles’ gas tanks to get to work.

People care less about fiscal policy and the good effect of higher fuel prices on the current environment when their livelihoods suffer. It’s easy to imagine how hard it might be for the government to stick to its decision.

The Sensex is near a seven-month high and is trading near 18,000. That, good news from the euro zone and the U.S. government’s promise to provide additional economic stimulus adds to the positive sentiment. Meanwhile, P. Chidambaram’s return to the finance ministry, hopes of foreign investment in India’s aviation sector and other reforms have also made economy watchers happier.

Adding the diesel price rise to this list is appropriate, but only if it sticks. A relatively small amount of pain now will avoid a great deal more pain in the future.

Comments
One comment so far | RSS Comments RSS

The 14% hike in the selling price of diesel may have been imperative – and even this is not enough to reach a balance – but what really must be kept under check is the runaway hike in cost of food and vegetables. A 14% hike per liter of diesel should not have a very large impact on prices of essential commodities. eg take a diesel run trailer covering 200 kms (@8-10 kms per liter) to transport 500 kgs of cauliflower. on 25 liters of diesel on an average, his overall cost goes up by just Rs 125, but he is asking for a 10% hike in transportation cost. That is daylight robbery. Moreover, the Rs 125 extra spent should only lead to an increase of Rs 0.25 per kg. Strangely the price will be hiked by at least Rs 3-5 per kg. That is what the government should be shielding the public from

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