It is surprising that the government has decided to roll back the planned increase in the price of LPG. Surprising, because even though this price hike was unpopular, it had not raised hackles to the extent that a rollback was justified. Given the enormous increase in the world price of crude oil, people had expected prices to go up. If the move was meant to satisfy the Left, it is even more odd. After all, India’s LPG is consumed by the middle class, whereas the Left is supposed to be championing the cause of the poor.From a government that is committed to pro-poor growth, people would have expected a shift away from the trend to subsidise the affluent. Resources in the economy are limited and the opportunity cost of giving a subsidy to one section of society is to take it away from another. Pro-poor policies consist of increasing the share of national income consumed by those below the poverty line. There is no case for giving a higher subsidy to the affluent. This will, in no way, improve the lives of those who remain in deep poverty. An additional flaw in the rollback is that it is not being replaced by an on-budget subsidy. Oil companies are supposed to continue cross-subsidising LPG. Later, when oil companies ask for higher protection and profit margins, because they are meeting the political objectives of the government, the government will be unable to resist the pressure to distort tariffs and prices to favour them. Even if the government wishes to continue the subsidy, it must clearly pay it out of the budget.Further, the profits and incentive structures of oil companies, or other PSUs, should not be confused with bringing in social or political objectives into the picture. The move will continue to keep petro product prices in the domain of political decisions. Given the trends in the prices of crude oil, it has become even more important today to depoliticise the process by which petro product prices are determined. For a government which already suffers from a credibility problem, such a roll back is damaging. This, taken with the fact that promises made on FDI in telecom and insurance remain to be fulfilled, could lead to the ebbing of the confidence that the government had managed to instill in domestic and foreign business.
