Liberalizing the Indian Economy (Part 2)

by Sreevidya Raman


In part one of this article, we learned about liberalizing the economy in the sense of allowing foreign direct investments (FDIs) in the retail and aviation sectors. A second set of measures have also attracted a lot of - albeit mostly negative - attention. The hike in diesel prices of Rs. 5 per liter and the cap on LPG to six cylinders annually is not exactly a measure that is being welcomed by anyone, really.

The most ferociously voiced opinions of the layman, with respect to the diesel price hike, are the miseries wrought by the ‘cascading effect.’ This is a reference to the series of unanticipated events that result from the imposition of an act or measure on a system. Considering that the majority of government vehicles guzzle up diesel, such an abrupt price rise on diesel prices has a direct and adverse impact on a number of industries. Perhaps the most evident example of such an industry is textile.

Tamil Nadu accounts for one third of the nation’s textile business, and true to this title, employs up to 50 lakh workers and draws in a gross value of Rs. 50,000 crores foreign exchange earnings. Unfortunately, it seems that the state acquires over 95 percent of its raw materials, specifically cotton, from other far away states like Gujarat and Maharashtra. What these statistics tell us is that over six million handloom and powerloom weavers across the country, most of whom are concentrated in Tamil Nadu, will suffer gravely as transportation costs in the industry soar to an all new high. Southern India Mills’ Association’s (SIMA) chairman, S. Dinakaran, promises that this will cause social unrest.

Having heard the common man’s woes, what do the experts have to say? First of all, what are these two measures meant to accomplish? The answer is that the government is aiming to cut its oil subsidy bill by Rs. 20,300 crore by increasing the price of diesel and limiting the supply of subsidized cooking gas. A subsidy is an aid paid by the government to the producer for three reasons:

• to prevent decline of the industry;
• to prevent an increase in the prices of its products; or 
• to encourage it to employ more labour. 

The problem is that the Indian government has recently accrued quite a fiscal deficit (a situation that arises when the government’s expenditure is greater than the revenue it generates) of up to 6.1 percent of the gross domestic product (GDP). The main disadvantage of a fiscal deficit is the paying back of interest on loans. If the government wants to reduce the gap between its revenues and spending, it must necessarily take some bold measures that not only have a direct impact on the economy, but also serve the purpose of sending a strong message to investors, whereby again, FDI inflows will surge.

The diesel price hike was proposed by Kirikh Parikh. In February 2010, Parikh headed a committee that released a report that recommended a ‘viable and sustainable system of pricing of petroleum products,’ which proposed that the government decontrol oil prices and increase prices of kerosene and LPG.

According to Parikh, “...loss to oil companies due to fuel subsidies is to the tune of Rs. 2 lakh-crore and that they may go the way of loss-making air carrier Air India if fuel prices remain unchanged.” Considering that this is not an option, a price hike is the only way to go.

As a final note on the diesel price hike, opposition by political leaders such as West Bengal Chief Minister, Mamata Banerjee, has been easily refuted by the Petroleum Ministry, which has suggested that serious concern on the part of state governments can simply be followed up by a reduction in the VAT/sales tax rates on petrol and diesel to lessen the burden on the consumers.

Finally coming to the cap on LPG cylinders; what does Banerjee have to say about these remaining reform measures inaugurated by Prime Minister Manmohan Singh?

"The price of diesel has been increased by Rs. 5 without any discussion. LPG has been limited to six cylinders annually, where four to five cylinders are required each month. Small households require three cylinders.”

"After withdrawal of the subsidy if one has to buy a cylinder for Rs.1, 400, then how will one subsist? The government will give subsidy on six cylinders per year for a family and they have to buy the rest at Rs. 1, 400 per cylinder. In that case, we have to think whether we will remain in this government.”

The fact of the matter, however, is that the reduction of subsidies on LPG cylinders will pinch the pockets of the middle class more than anyone else.

Courtesy Economic Times

As we can see, there is minimal impact on the poorer sections of society as they use less than nine cylinders a year. Thus, the extra money that they will now have to shell out monthly is less than Rs. 100, not a significant enough impact to justify the ruckus the introduction of the measure has created. The increased burden of the cap on cylinders however, grows as we climb the income ladder. Ultimately, it must be admitted that the middle class can afford to loosen their purse strings, considering necessity of the measure to reign in the fiscal deficit.

Thus, it is safe to believe that Singh didn’t graduate with an economics degree from University of Oxford without learning a thing or two about how to manage an economy.

References

Banerjee, Soma. "Government's LPG Cap to 6 Cylinders per Household Will Not Upset Your Budget." The Economic Times. The Economic Times, 19 Sept. 2012. Web. 30 Sept. 2012. <http://articles.economictimes.indiatimes.com/2012-09-19/news/33952568_1_cylinders-household-lpg-cap>.

"POLL: 93% Urban Indians Say LPG Cylinder Cap Unjustified." Rediff. Rediff News, 27 Sept. 2012. Web. 30 Sept. 2012. <http://www.rediff.com/news/slide-show/slide-show-1-poll-93-per-cent-urban-indians-say-lpg-cylinder-cap-unjustified/20120927.htm>.

"Diesel Price Hike Will Affect Handloom, Powerloom Sectors: SIMA." The Economic Times. The Economic Times, 15 Sept. 2012. Web. 30 Sept. 2012. <http://articles.economictimes.indiatimes.com/2012-09-15/news/33862919_1_diesel-price-hike-chairman-s-dinakaran-litre-price>.

"Subsidy." Wikipedia. Wikimedia Foundation, 26 Sept. 2012. Web. 30 Sept. 2012. <http://en.wikipedia.org/wiki/Subsidy>.

"Economy." Http://www.hindustantimes.com/. Hindustan Time, 28 Sept. 2012. Web. 30 Sept. 2012. <http://www.hindustantimes.com/business-news/WorldEconomy/Fiscal-deficit-may-rise-to-6-1-if-corrective-measures-not-taken/Article1-937247.aspx>.

"Diesel Price Hike: Mamata Banerjee Demands Rollback, Threatens to Withdraw Support."NDTV.com. Press Trust of India, 14 Sept. 2012. Web. 30 Sept. 2012. <http://www.ndtv.com/article/india/diesel-price-hike-mamata-banerjee-demands-rollback-threatens-to-withdraw-support-267117>.

"Meet the Man behind the Rs 5 Diesel Price Hike and Why He Thinks Its Justified." Yahoo! India Finance. Yahoo!, 14 Sept. 2012. Web. 30 Sept. 2012. <http://in.finance.yahoo.com/news/meet-the-man-behind-the-rs-5-diesel-price-hike-and-why-he-thinks-its-justified.html>.

Jayaswal, Rajeev. "Petrol, Diesel, Kerosene and Cooking Gas Price Hike after September 7: Oil Ministry." The Economic Times. The Economic Times, 5 Sept. 2012. Web. 30 Sept. 2012. <http://articles.economictimes.indiatimes.com/2012-09-05/news/33615947_1_data-keeper-kerosene-prices-litre>.

"Kelkar Panel Wants Govt to Hike Fuel, Food Prices." Kelkar Panel Wants Govt to Hike Fuel, Food Prices- TIMESNOW.tv. N.p., 29 Sept. 2012. Web. 30 Sept. 2012. <http://www.timesnow.tv/Kelkar-panel-wants-Govt-to-hike-fuel-food-prices/articleshow/4411495.cms>.

Mishra, Richa. "Petrol in US Cheaper, Diesel Costlier." Business Line. Business Line, 6 Sept. 2012. Web. 30 Sept. 2012. <http://webcache.googleusercontent.com/search?q=cache:RxTRuH50HA8J:www.thehindubusinessline.com/industry-and-economy/article3866137.ece+&cd=2&hl=en&ct=clnk&gl=in>.