UPA-2 finally deregulated the price of petrol but not the price of diesel and maintained most of the subsidy on LPG, or liquefied petroleum gas. That is not to say it did not raise the price of diesel. It did by Rs. 2 but could make the political pitch that it is not allowing free pricing of diesel, and consequently remains the guardian protector of the aam aadmi. Simultaneously, by keeping the subsidy on LPG and raising prices by only Rs. 35 on a standard cylinder, it can pose as a friend of the urban middle class.
Political parties led by the BJP and the communist parties have begun their hue and cry, and so have the urban classes, but I doubt these will attain any strength. Most of the country is ready to embrace the free market.
The decision is a big step toward reform of oil and gas prices, long overdue, and recommended by the Kirit Parekh panel. However, the move is not to be confused with complete deregulation. The government still retains the right to control domestic prices in the event global crude oil prices reach stratospheric levels of, say, $140 per barrel, as it did two years ago. Of course, it has neither set any price level beyond which it will intervene or the level of intervention. That is to be understandable, given the need for political maneuverability at any given situation.
To me, the greater significance of the move lies in the fact that Prime Minister Manmohan Singh appears to have finally won over Sonia Gandhi when it comes to economic reforms. But for the Congress party chief’s opposition, he would have pushed through oil deregulation, not to mention other reforms, much sooner. Gandhi holds on to a socialist agenda because she doesn’t comprehend the force of economic reforms. But even more importantly, she resists most reforms because she wants to firmly ally with the interests of the aam admi, or common man, and wants no vote lost in the run-up to anointing her son Rahul Gandhi as the prime minister, probably in the 2014 general electrions.
The timing of the decision may not be the best, considering the alarming rate of inflation. But then, the government had been sitting on it for too long and I guess it had to be made to rein in the fiscal deficit. In that context, I am glad the government did not take comfort in the higher-than-expected gains from auction of 3G spectrum to postpone the oil price hike. Having said that, the big question is: How will the economy deal with the higher fuel prices without derailing the ongoing recovery and growth?