It was the compelling arguments put forward by Finance minister P. Chidambaram at the crucial Cabinet committee meeting that forced the UPA to “bite the bullet” on hiking diesel prices. Highlighting the threat of rating downgrades by international credit agencies as well as the increasing price differential between petrol and diesel, the Finance Minister bolstered the case of Petroleum minister Jaipal Reddy in seeking a price hike in diesel.
The UPA was acutely aware of the timing that the steep Rs 5 hike in diesel comes; as Himachal Pradesh and Gujarat gear up for crucial Assembly elections despite that the FM made clear at the meeting that “unpleasant decisions” need to be taken.
Chaidambaram has for some time now made it amply clear that it was not possible for the government to bear the increasing subsidy burden due to subsidies on petrol and diesel.
Of late, credit rating downgrade threat by Fitch and then by S& P, has definitely alarmed the government. The FM explained the scenario where a rating downgrade would adversely impact the Indian economy leading to an escalation in interest rates.
The burgeoning fiscal deficit due to the unwieldy subsidy bill borne by the government on account of subsidies in petroleum products was also a factor that made it imperative for a price hike. It was highlighted that the current under recovery on diesel is a whopping Rs 17.
Another clinching argument that was put forward was that while petrol being a decontrolled commodity, price revisions had been taking place for some time now unlike that in diesel. Therefore the price differences between petrol and diesel were increasing.
The government also elaborated that it was keen to check the distortions that had crept in as a result of this – it had encouraged dieselization with attendant adverse environmental impacts. Higher number of diesel cars, greater use of diesel generator sets and liberal use of diesel in agricultural sector the FM said needed to be corrected.
Acquiescing with the points put forward by the FM, Farooq Abdullah, the minister for new and Renewable Energy urged the UPA government using an oft quoted phrase to “bite the bullet.”
Painting a grim picture of the economy if corrective measures were not taken, Chidambaram also pointed out that the depreciation of the Rupee against the US Dollar has led to further escalation in the under-recoveries of the public sector OMCs. From a situation of 44 rupees a dollar in June last year, it had now reached 57 rupees to a dollar in July 2012.
Significantly, this was not the first time that the finance minister was explaining the current economic scenario to the UPA and it allies. Even at the last coordination committee meeting the FM had elaborated on the grim realities confronting the Indian economy. Trinamool Congress chief Mamata Banerjee was present at the last meeting. However TMC minister Mukul Roy was not present the CCPA on Thursday when the final decision was taken to hike diesel prices.
As for LPG prices, CCPA members were told that it had been found that 49 per cent consumers used only six cylinders per year.
Given the bold decisions that the government was taking the UPA managed to silence all dissenting voices by arguing, “Once the economy is back on track, everything including public mood will change.”
