(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
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.
- 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
- 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
(Editing by Edward Hadas and Sarah Bailey)