Opinion remains divided on whether or not the continuing instability in West Asia and North Africa (WANA) will continue to drive up global crude oil prices, and therefore India’s oil import bill, or whether, in fact, there would be a correction based on OPEC addressing concerns about supply. Either way India cannot, as of now, take things for granted. A medium-term energy security strategy needs to be put in place, based on the assumption that India’s growth and balance of payments can be potentially hit by a possible terms of trade shock. Given renewed concerns about global growth, it is entirely possible that there could be a slowing down of global trade and increased volatility in capital flows.
While things may not turn out to be as bad as what the pessimists expect, a new oil shock, India’s policy planners must have a back-up strategy for the management of external shocks. Even without a future shock, India’s present oil subsidy has become too big to finance. While the limits may have been reached to increasing only petrol prices, without touching diesel, kerosene and LPG, the Union finance ministry’s ability to reduce duties on petroleum goods to cushion a further rise in the oil import bill is also limited. The government’s carefully crafted fiscal consolidation strategy would go into a tailspin if it begins to reduce duties as a way of warding off the inflationary consequences of higher oil prices.
Given that India and its government find themselves between a rock and a hard place as far as oil and petroleum goods price management is concerned, the best option for the government is to begin the process of increasing diesel, kerosene and LPG prices. Most patriotic Indians would understand if the moves are properly explained. Everyone knows what is happening in WANA and that the Jasmine Revolution is bound to hurt the Indian economy. Voters in Assam, Kerala, West Bengal and Tamil Nadu are essentially going to vote out governments that they are tired off. No angry voter in any of these states is going to turn hostile to the centre and its coalition partners because of a rise in oil and energy prices against the background of the situation in WANA. By delaying decisions on diesel, LPG and kerosene prices, the government runs the risk of destabilising the growth process and India’s balance of payments. The medium-term consequences of these two would be far greater than the few votes that the ruling Congress may lose in a couple of state elections. The key issues in each of the states that are going to the polls have to do with state-level development and governance. The centre, on the other hand, must do what it must in managing India’s energy security and economic stability.