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FEB 06 2014

When voter is ignoring Rs 7,50,000 cr oil subsidies, why will Rahul’s 12 cylinders work?

  • Economic Times, ET Bureau / Hyderabad
  • Created: Thu 06th FEB 2014

Will offering consumers 12 subsidised cooking (LPG) gas cylinders instead of nine save Rahul Gandhi's Congress from ignominous defeat? Petroleum Minister Veerappa Moily has compounded the problem by subsequently reducing the prices of CNG and cooking gas, too, but that is par for the course, and only makes the issue sharper.

In mid-January’s AICC bash, the heir-apparent wanted the subsidy cap raised, and Petroleum Minister Veerappa Moily nodded his head vigorously. He made good on his promise last week when the Union cabinet okayed the plan and added a fresh dollop of Rs 5,000 crore to this year’s massive oil subsides - which had already crossed the Rs 1,00,000 crore mark as on 31 December 2013.

Reserve Bank Governor Raghuram Rajan calls this a “misdirected subsidy”, but what’s a Rs 5,000 crore “misdirected subsidy” when measured against the approximately Rs 7,50,000 crore wasted on oil subsidies over its entire 10-year term?

The political economy question is this: if the electorate is not impressed by the massive and continuous subsidisation of petro-products on this scale over 10 years, why would Rs 5,000 crore more now make a difference?

Clearly, the UPA has learnt nothing from the NDA’s debacle in 2004.

The bitter truth is that the voter is unhappy despite the Rs 7,50,000 crore spent in subsidising her for 10 long years. It is precisely this subsidy that has killed off hopes for a better future — though she doesn’t know it.The bitter truth is that the voter is unhappy despite the Rs 7,50,000 crore spent in subsidising her for 10 long years. It is precisely this subsidy that has killed off hopes for a better future — though she doesn’t know it. PTI

In 2003-04, the NDA announced its most ambitious reform project by abolishing administered pricing in oil prices. But when elections were prematurely called, it got cold feet and announced that price increases and deregulation will be temporarily held in abeyance. The electorate paid no heed and chucked the NDA out.

The message is clear: the electorate does not decide whom to vote for on the basis of small pre-poll mercies. It takes a call on the whole of a government’s performance over a period, and the fact is that the NDA period saw relatively low growth (around 6 percent average), and the uptick in growth in the last year of its rule (2003-04) did not matter. It would have been voted out even if oil prices had remained deregulated. The UPA itself won re-election in 2009 nor because of these subsidies, but because of high-powered growth in 2003-08. UPA-2 has lowered the boom.

If Rs 7,50,000 crore of oil subsidies over 2004-14 have been unable to impress the voter, Rs 5,000 crore more doled out at the last minute is hardly going to change her mind.

On the other hand, the counter-intuitive fact is this: the Rs 7,50,000 crore subsidies handed out over 10 years are likely to be a major contributory factor to UPA’s impending defeat in the April-May general election. This is what various opinion polls are telling us. The people are talking about inflation and lack of jobs; they are not talking about how grateful they are for past subsidies.

Here’s how the dots connect from the massive oil subsidies and electoral defeat.

India’s fiscal problems relate to three F’s — the subsidies on food, fertiliser and fuel. Assuming the last two are largely necessary, that leaves only fuel as the main reason why the fiscal deficit has bloated beyond repair. The fiscal deficit which caused inflation to continue endlessly is partly (or even largely) the result of this unmitigated fuel subsidy.

The second deficit — the current account deficit (CAD) — is also the result of this Rs 7.50,000 crore oil subsidy. The main reason why India’s CAD (the gap between what the country spends abroad and what it earns) hit 5 percent before the government clamped down on gold imports last year and let the rupee slide to Rs 69 to the dollar, is also the oil subsidy.

This is how it works. When local oil prices are heavily subsidised, consumers refuse to cut down on costly oil since for them the price is the same even though world prices are hitting the roof. Since it is logical to assume that what is free or cheap will be wasted, our oil imports — we import 80 percent of our requirements — went through the roof and were the prime cause of the worsening CAD last year.

Low domestic oil prices make the CAD worse for another reason: when you take money out of the profits of oil producers like ONGC and Oil India, they won’t have money to invest in exploring for new oil or gas fields. So the country’s oil import dependence gets even worse — another cause for oil subsidies to worsen in future.

A high CAD in 2013 made the rupee tank, which, in turn, made oil even costlier, inflation worse, and subsidies bloat.

High inflation has made people curtail consumption and companies delay projects. People are not buying consumer durables (cars, ACs, LCD TVs) as much as in 2012-13, and companies are sitting on cash (Reliance Industries alone had Rs 88,705 crore in cash, bank deposits, government and corporate bonds and mutual funds in December 2013. If people don’t spend and companies sit on cash, we have a right royal slowdown.

The Central Statistical Office (CSO) has just pegged the 2012-13 growth lower at 4.5 percent, which may make this year’s numbers look better, but this is a statistical illusion.

The bitter truth is that the voter is unhappy despite the Rs 7,50,000 crore spent in subsidising her for 10 long years. It is precisely this subsidy that has killed off hopes for a better future — though she doesn’t know it.

The moral of the story: short-term populism has a long-term electoral cost. UPA’s Rs 7,50,000 crore oil subsidy is money down the drain. It is not good enough to purchase votes.


Veerappa Moily Oil ONGC Petrol CNG Petroleum Indus Liquefied Petroleum Gas India

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