Posted by: John Elliott | June 5, 2008

Indian government tries to cope with oil prices

At last, after weeks of dithering, the Indian government has begun to deal with the crippling financial consequences of rocketing oil prices. On Wednesday, it announced that it is raising the price of petrol and diesel by about 10% and cooking gas by 17% to save three state-owned oil companies from looming bankruptcy. Only kerosene, used by hundreds of millions of the poor for cooking and lighting, was spared.

The government had to do something because the oil companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum – are facing a multi-billion dollar hit (some estimates put it as high $60 billion) in the current financial year due to the soaring cost of crude oil. India imports 75% of its oil.

Wednesday’s move will worsen India’s already high rate of inflation, which is edging towards 9%. As Prime Minister Manmohan Singh has already acknowledged, the current 8.1% rate is socially and politically unacceptable.

In recent weeks, the government has tried to stem the inflationary tide by cajoling and bullying steel and cement companies to hold prices for at least three months, and introduce some cuts. More controversially, it has banned rice exports and has also stopped (since last year) futures trading in food commodities, most recently potatoes and chick peas.

This has led to allegations of pointless political gimmickry. The next step might be a hike in interest rates, which would curb growth and might have little effect on what is largely internationally generated inflation. But it will be difficult to do much, given the current world-wide food price crisis and the fact that India imports most of its oil.

The direct inflationary impact of yesterday’s petrol and fuel price hikes is the being softened by the government scrapping customs duties on crude oil and associated imports. That however will cost $5.5 billion in lost revenue, which will worsen the fiscal deficit. Nothing is easy in this economic balancing act.

Inevitably, the government has few supporters for its announcements, apart from the oil companies which welcomed a partial reduction (around 25%) of their financial problems.

Many economists and newspaper editorials took the easy line that what the government had done was “too little too late”. Singh seemed almost to agree, saying it was the “modest bare minimum” needed. What he meant was that anything more would have endangered the stability of the government because of opposition from leftist parties that support the Congress Party – led United Progressive Alliance coalition in Parliament (now safely in the summer recess).

The parliamentary opposition was outspokenly critical – one of its more headline savvy spokesmen called it “economic terror” – and the leftist parties are taking to the streets with countrywide bandhs (political strikes that shut down parts of cities) that started Thursday in three states.

The growing economic crisis is especially embarrassing for the government because it has presided over strong growth of 9% or more, and limited inflation, since it took office in 2004. Now, with various state elections due in the coming months – and a general election by next May– it is facing internationally generated economic problems that may prove impossible to contain.

This is leading to criticisms of what was once called the “dream team” of economic reformers in charge of government policy – Singh, who is a former finance minister and a respected economist; Palaniappan Chidambaram, the finance minister (by profession a top international lawyer); and Montek Singh Alhuwalia, an economist-turned bureaucrat who runs the Planning Commission.

Dream they may be in terms of believing in economic reforms, but they are not a dream politically. Sadly, they have little idea how to pull the strings of government and handle difficult coalition allies such as the Communist-led left. And Sonia Gandhi, the Italian-born leader of both the Congress Party and the coalition who ultimately calls the policy shots, does not have enough experience to handle difficult political and economic issues.

As a result, economic reforms have been stifled by the left for the past four years, a key nuclear deal with the United States seems doomed, and now the government is looking less than confident and astute in its handling of inflation.

Unless its luck – and political savvy – changes, Congress’s chance of being returned to power next year at the head of a new coalition will decline sharply. The last Bharatiya Janata Party-led coalition lost the 2004 general election because voters did not believe that, along with regional political party allies, it had done enough to help the rural poor. This time, it is Congress and the left that face a risk of the same fate, with urban voters joining what last time was a rural-led protest.


Responses

  1. Anticipating future is an art,ofcourse in economy it holds good.But Indian politicians spend more time for politics than policies.Whether its hike in crude oil price or consumer goods price,no matter,but consequences are very fatty inflation figure.Here policy makers failed to anticipate the particular problem which may erode the GDP.Now no country including USA finds the reasons for accelerated crude price,still searching for a cure,cause unkown.OPEC has clearly pronounced there is no supply problem,so no hike in crude production till December.It means that very idea of speculation will be more aggravated,and more rise in crude price.In this context India will have to bear the brunt of very high inflation till December.What will happen to GDP,what will happen to foreign exchange reserve and India’s growth story?Will be the GDP sustained at 8.5 or above.The answer is a simple no.This may be the begining of a very nasty erosion of wealth and growth.Altough we are not fully coupled with USA,but not decoupled either.How the USA economy is reeling under a pressure,are we heading towards the same way or sooner or later we get the jolt.Our Prime minister and FM are more eligible persons to find the answer and rectify the problem to prevent further damage to an emerging economy.

  2. Too little too late it is. But see how the principal opposition parties have reacted. Politics of the pettiest variety has overtaken the demands of good, responsible governance. Not that the government is blameless. Even as oil prices were moving one way, hare brained schemes which are going to cost over a hundred thousand crore rupees were being launched in the hope of getting additional votes. With that kind of mindless profligacy being shown by the Congress party(other political parties will not criticize them too loudly for these out of fear of losing votes!), there is no place to hide really from the oil shock. That this will become a big electoral shock too is becoming clearer with each passing day.

    http://www.indiaretold.com

  3. John,

    while you correctly identified current inflation as an international/global phenomenon or “imported inflation”…you missed same analysis on growth..India’s 9% growth too is an international/global phenomenon…or ” imported growth !!!”…there was NO magic or rope tricks from so called dream team’s trinity.

    but i do have high hopes and confidence in capitalism…capitalism will teach us Indians get over this and get back on growth track.

  4. I guess the “Economic Superpower” will be delayed a bit. If you want to see the future look to the rise and fall of Enron. The same games with accounting, “off balance sheet” (or off budget) debt, the same games with hubris, corruption and the same denial of facts. Enron used “illusionary paper profits” and India only uses somewhat dubious statistics, like “Wholesale Price Index” instead of the more reflective “Consumer Price Index” India somehow manages to say “unemployment is around 7%”. 7% of what base? No definitions are provided. Does anyone believe any statistics from India, NASSCOM, or any consultancy? Governmett debt is 95% of GDP plus all the “off budget special purpose bonds”

    India’s government debt is rated Ccc+ or “junk” by all the non India rating agencies.

    Enron imploded and unless India changes its ways very soon, it too will rejoin the ranks of those with “Third World Country” status, except for the pockets of prosperity in the cities.


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