The Modi-Jaitley duo has been incredibly lucky. The 60 per cent fall in crude prices is the single most important factor for effecting corrections in fiscal administration. They could not have come at a better time for them.
The huge increase in crude prices threw the economy out of gear: massive outflow of foreign exchange for import of petroleum products accounted for the lion’s share of imports. These touched $ 150 billion last year. The inability to adjust product prices to costs; the resultant bulging subsidies on diesel, LPG and kerosene; the difficulty in compensating oil companies fully for the increasing costs of crude leading to their bleeding; increased transportation costs; raging inflation of recent years were all the result of the high price of oil.
The government has utilised this God-given boon in effecting much needed corrections. Firstly, to do away with price control on diesel. Second, to put limits on subsidy on PDS kerosene and LPG. Thirdly, to utilise the Aadhar card for direct transfer of subsidy to the beneficiaries; this is also expected to reduce a lot of bogus claims. The government has also permitted oil-marketing companies to recoup a portion of the losses suffered by these in recent years by not passing on the benefit of lower crude prices proportionally to the consumer. On the same logic, the government had also increased the excise duty on refined products to take care of the revenue losses suffered by the fall in product prices. Poor Dr. Singh, he didn’t enjoy this windfall!
Once these corrections take effect and there is the prospect of crude prices remaining stable around $ 40 per barrel, the government can focus on fiscal correction over a wider base. Reserve Bank Governor Raghuram Rajan has effected an interest rate reduction of 25 basis points (0.25 per cent) for the first time since May 2013. This may be too small to make a great impact, but it has good value for improving market sentiment. There are expectations of such reductions announced in quick succession.
But the major issue to be tackled relates to the runaway rise in prices of a wide range of goods like cement and steel, especially the former, not quite related to costs of production. Such rises have serious impact on housing and infrastructure development. Cement prices have risen over the last couple of years by 50 per cent and are presently ruling around Rs 380 per bag.
The steep increases in the procurement prices of rice, wheat and other agricultural commodities and the unrealistic prices for sugarcane have resulted in a high rate of food inflation. Several state governments, unable to control market prices are bleeding through hefty subsidies on food. The solution lies in massive increases in productivity that will ensure farmers higher revenues through increased production and not by subsidies and increased state- advised prices.
There is criticism over the spate of ordinances promulgated by the Modi government. Sadly, the government doesn’t seem to have much of a choice. Opposition parties have stalled any effective legislative action in the Rajya Sabha where the NDA lacks majority. Essential reforms cannot obviously wait indefinitely. In fact, this paralysis was the cause for UPA II government’s disastrous management of the economy. Opposition parties should help the government to arrive at consensus on major economic issues. That the NDA did to the UPA what the UPA is now seeking to do to the NDA is another issue.
The Modi government won praise from the Secretary General of the United Nations, President of the World Bank, Secretary of State for the US and numerous other leaders at the recent Vibrant Gujarat Meet. Its leadership should endeavour to build consensus and take along the opposition parties at the Centre and the different regional political parties.
With several favourable factors on its side, the government should not miss the opportunity to present a growth-oriented budget that would help the economy gain momentum.