With their backs to the wall, the cash starved government could finally bite the bullet. During the first six months of the current financial year, the state-owned OMCs (Oil Marketing Companies) Indian Oil (IOCL), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) have lost (or under-recoveries) Rs.855.9 billion by selling diesel, domestic LPG and kerosene at government-controlled rates which are way below their cost. Of this, diesel itself accounts for as much as Rs.527.1 billion. Of the total under recovery, the government has promised a cash support (not yet delivered) of Rs 300 billion while the upstream oil companies like ONGC have provided Rs 301.7 billion, thereby leaving a deficit of Rs.254.2 billion that still needs to funded. For the full year, the total under recovery on this account is likely to be about Rs.1.6 trillion. Even if the previous year’s subsidy sharing scheme (wherein the upstream companies shared 40% of the total under-recovery burden) is followed, the government would still need to chip in with a total of Rs.960 billion as its share of oil subsidy. That’s going to leave a huge dent on the government finances especially in the aftermath of lukewarm response to disinvestment and virtual flop show (caused by unrealistic price targets set by the greedy government) during the 2G spectrum auction. With only one final quarter remaining, clearly the government faces an uphill task.
The proposal is absolutely in the right direction, as it would ensure necessary structural adjustments to bring the government finances under order. We are already witnessing a slowdown in government spending on capital account (thereby impacting future growth) as deficit rises.
While the proposal is perceived by some quarters are risky (given that India is entering the home stretch for the 2014 general assembly election) for the ruling govenrment, I believe it’s a pretty smart move. If the proposal goes through, it will free up government finances like never before thereby giving them ample opportunity to carry on with their social sector initiatives. At the same time, if the cash transfer scheme succeeds, the recency effect of the benefits of the various schemes would far outweigh the cost (especially given the staggered manner in which the price hike will take effect which would make it easier for the people to absorb the price rise). Given the drubbing that the Congress received in Gujarat recently and other larger states earlier, the government is desperately banking on the goodwill that the various social sector schemes would generate, to carry them home given the absence of any other differentiating factor.
While the inflationary effect of this proposal cannot be ignored, it would be short term in nature and I do not think this should be a worry as the long-term benefit of such a scheme far outweighs the cost.
But then, ‘to be or not to be’ remains the question. Even if the government finally approves this, will the opposition agree to this? While the TMC (which possibly represents everything that is wrong with the economy and politics) may have been marginalised, their raving and ranting may yet strike the right chord with some of the opposition parties and hence derail the scheme. Or, will the floor management expertise of the government (influenced by the CBI, as insinuated by some) carry them home. It’s a trillion rupee question now.