Build on the hike

Govt mustnt roll back increase in petrol prices. And it must take the logical next step on diesel

Govt mustnt roll back increase in petrol prices. And it must take the logical next step on diesel

The hike in petrol prices should be the first step in a complete reform of the current system. While petrol prices are decontrolled,petroleum companies do not have the freedom to hike prices if the government objects. The government should not give in to the pressure to roll back the hike. The cash position of oil companies is precarious. Any rollback would immediately reverse the positive market sentiment that may have come about because of the petrol price hike. When the GoM on petroleum prices meets on Friday,it should take the logical next step and increase the prices of diesel and kerosene as well. Further,it should announce a timetable for moving towards decontrol of prices of all petroleum products and even fertilisers. Such an announcement would be all the more credible if it is accompanied by a timeline for moving to directly targeted subsidies through smart cards or the UID.

A change in the petroleum-pricing policy and subsidy regime has long been on the cards. The question is whether to do it before a balance of payment crisis is upon us and,through it,to avert the crisis or to effect the change subsequently. The Congress needs to convey to its allies the difficulties of first allowing the crisis to build up and then changing policy. Since general elections are two years away,averting a difficult situation through unpopular policies now may make more sense than allowing a BoP crisis whose effects last much longer and are likely to be felt right through to 2014.

Predictably enough,the Congresss allies in the UPA have opposed the petrol price hike. But for now,no one,not even Mamata Banerjee,has threatened to imperil the government. In the end,the allies self-interest will persuade them that it is not optimal to continue with the present oil-pricing policy. If the economy keeps sliding,likely if the government were to continue with the present oil price policy,the UPA will have to pay a political price.