A start is made, but long way yet to go

The slew of decisions taken by the Manmohan Singh government in the past two days — from the diesel price hike of roughly 11-12 per cent, reduction in the number of subsidised LPG cylinders per family, the permission for foreign direct investment in multi-brand retail and aviation, and the partial disinvestment in four public sector companies — reflects its urgency to show the country and the world that there is no policy paralysis, boost industrial sentiment, and renew the climate for increasing international investment.

This is welcome but the government still has a long way to go to put in place measures that will strengthen the supply system, sharpen its delivery system, plug leakages and tackle corruption with alacrity. The subsidy issue, necessary to tackle the fiscal deficit, is far from dealt with. The hike in diesel prices will make no dent in the government’s fiscal deficit where fuel subsidy accounts for around `68,481 crore. As long as the fiscal deficit remains as high as it is, inflation will be high, interest rates will stay high. This cannot be good for investment.
The FDI in aviation will certainly benefit India’s airlines and put less pressure on the banks that are burdened with non-performing assets of airline companies. Also, the PSUs coming to the capital market will boost stock markets. But the impact of FDI in multi-brand retail will have to be watched as it concerns the future of millions of “mom and pop” stores. 
The diesel hike was long overdue. But if these price increases had been staggered at periodic intervals, they would have been more palatable. A sudden hefty dose, as now, will hurt the lower middle classes and others on the periphery. The government slept far too long, citing coalition compulsions and playing politics. One hopes it has learnt a lesson from the negativity caused by its inaction for the past year, and will, as the Kirit Parekh Committee on fuel prices has recommended, deregulate both diesel and petrol.
The `5 per litre hike in the price of diesel is a drop in the ocean as under-recoveries of the oil marketing companies on diesel still remain a massive `1,03,000 crore. So will the under-recoveries on LPG. Instead of allowing six subsidised LPG cylinders per family a year, the government could have allowed 12 per year and simultaneously raised prices minimally and often, to eventually bring them closer to market prices. That way the “shock” to the weaker sections is lessened.
All things considered, however, there has been a substantive movement on the economic front after a very long gap, although the political effect of the changes just announced may be deemed to be uncertain at this stage.