BREAKINGVIEWS-New Delhi must stand its ground on subsidy cuts

Fri Sep 14, 2012 3:02pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI, Sept 14 (Reuters Breakingviews) - A 14 percent hike in the price of diesel may be the beginning of India's long-awaited economic reforms. Now it needs to stay the course. A shift in public spending from consumption to investment is the ultimate goal.

The Congress Party-led government has waited for too long to give the economy a kick-start. GDP growth slowed to a 5.5 percent annual rate in the June quarter, near its slowest rate in three years. International credit rating agencies have threatened to downgrade the sovereign's debt to junk status over New Delhi's policy paralysis.

In practice, then, there was little choice but to do the right thing, even in the face of strong public and political opposition. However, the five rupee per litre increase in the price of diesel will only cut the treasury's $36 billion fuel subsidy bill by 10 percent. And the price of diesel at the pump would remain remarkably low by international standards, 40 percent of the UK level.

However necessary and however small this move, there is tremendous political pressure to back down, not least from within the government. A reversal would be disastrous, cementing Delhi's reputation for spinelessness.

The problem is fundamental. The fuel subsidies are presented as pro-poor, but are actually a goody for the middles classes. Such programmes divert public money from essential investment in health and education. After all, India has the world's highest rate of child mortality according to a report from UNICEF on Sept. 13. And its schools recently ranked second to last among 73 countries that participated in the Programme for International Student Assessment, conducted by the OECD. India spends 10 percent of its GDP on fuel, food and fertiliser subsidies as compared to a lowly 3.8 percent on education.

Instead of a reversal, the government should move faster. The cabinet is meeting today to discuss further reforms, perhaps including a liberalisation of rules on foreign direct investment in aviation. With less than two years to go before a general election, it would be wise to bunch together as many reforms as possible - not drag them out, or worse, keep them on the shelf.

CONTEXT NEWS

- The Indian government raised the price of heavily subsidised diesel late on Sept. 13. A cabinet committee increased diesel prices by five rupees per litre. That translates as a 14 percent rise, including taxes. The committee also decided to limit the number of subsidised cooking gas cylinders per household to six per year, a move seen as hitting the poor hard. Any LPG cylinders bought over this ceiling will be at market rates, which could almost double the price.

- The fuel price increase caused an instant political backlash. Trinamool Congress, a partner in the ruling coalition, announced a protest march at the weekend and the Bharatiya Janata Party (BJP) called the move "financial terror".

- Diesel is one of the main contributors to a subsidy bill that economists warn could push the country's fiscal deficit above a target of 5.1 percent of gross domestic product.

- The Sensex rose more than 2 percent to new seven-month highs on Sept. 14 following the announcement and after the Federal Reserve announced a new asset purchase programme.

- The cabinet will also consider a proposal on Sept. 14 to allow foreign airlines to buy stakes in local carriers. Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.

- Reuters graphic: Inflation, rates, IIP link.reuters.com/deq95s

- Reuters: India's diesel price hike heralds long-stalled reforms

- Reuters: Indian shares rally to 7-mth highs on diesel hike; Fed's 'QE3'

- Reuters: Indian cabinet to consider aviation FDI on Friday

- For previous columns by the author, Reuters customers can click on

(Editing by Edward Hadas and Sarah Bailey)

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