Sanity has come late, but it has arrived ?petrol prices
raised by Rs 5 per litre, diesel by Rs 3 and LPG by Rs 50 per cylinder and
taxes have been cut. We welcome the government?s move to comprehensively
increase energy prices. Our PM needs to be congratulated on finally taking
this step, and taking the country in confidence is the best way to do
this. It seems that finally, at the fag end of his tenure, Dr. Manmohan
Singh has arrived as a statesman. On the other hand, the BJP and other
opposition parties (which it seems include most UPA partners!) are showing
utter spinelessness by vehemently opposing a move which is the most
natural outcome of international economic forces.
Let us face it, the government can only absorb minor
economic shocks in a country as large as India. Try to absorb large
shocks, and it will only end up funnelling them back into the economy at a
multiple of the original.
This is also the right time for petro price reforms. First,
let us stop imposing customs duties on petro imports on an ad valorem
basis. That only increases the shocks into the system and is
pro-inflationary. There is no reason why import duties on petroleum (which
should be there) cannot be on a volume basis. Two, clean out the subsidy
regime, stop favouring diesel, target the poor households better etc.
Three, and this is all well known, let us delink petro prices from
government control. Four let there be a fair playing field for both
private and public sector firms.
Whatever the government does, inflationary tendencies are
here for a while, and they will further spread through the economy in the
next few months ? no matter whether the data capture it or not. And
despite the fact that some past growth estimates have been revised upwards
(9% for 2007-08), the moderation shows in the quarterly estimates with the
fourth quarter coming in at 8.8%, lower than the previous quarters. We
estimate this years? growth to be about 8.2%, but are among the most
All indications from other sources now confirm a moderating
growth ? from PMI survey that shows lowest expansion in manufacturing in
10 months in May to real estate stories of decline in transactions and
freebies to attract buyers etc. The signs are now quite clear that things
will not be so rosy this year. Silver linings do exist ? monsoon will
favour agriculture, telecom and railways are still doing well, exports
rose with the fall in the rupee in May. But the dark clouds of high crude
prices and global slowdown cannot be wished away. So brace yourself for a
tough year ahead, but at least we can now be proud of a government that
does not consist only of wimps.