A photograph of Indian currency | Dhiraj Singh/Bloomberg
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RBI holding rates & govt cutting fuel prices show India is simply being buffeted by politics.

A couple of things happened last week in India that deserve a bit of attention – mostly because they reveal how deep the country’s structural problems go and how few good options the government has left. The first was the Reserve Bank of India’s decision to hold interest rates steady even though the rupee had hit record lows against the US dollar. And the second was the federal government’s attempt to suppress rising fuel prices.

The RBI’s steadiness on rates was born of its belief that inflation was close enough to the bank’s target zone. Now, you might disagree with this belief – as I do – but there’s no question that the central bank’s monetary policy committee was doing its job as it saw it.

The problem lay in the reaction to the RBI’s decision. Naturally, the rupee fell even further; markets had hoped for higher interest rates that would have encouraged foreign investors not to sell their rupee-denominated assets. A chorus of voices, some within the political establishment, began to complain that the RBI was ignoring the rupee, ignoring threats to growth and so on.

That’s no longer the RBI’s job, however. One of the big institutional changes of the past few years in India has been the creation of a legal mandate for the RBI to target inflation and nothing else. Rational monetary policy, made along predictable lines, is a good thing. Hopefully, this won’t lead to another round of tension between the RBI in Mumbai and Finance Ministry bureaucrats in New Delhi. The government tried various measures last month to prop up the rupee.

If the government is so concerned about the rupee, one would think it would be pushing to raise, not lower import prices. Instead, last week officials told state-run (but publicly traded) oil companies to reduce prices by a rupee a liter and to absorb the losses themselves.

The government also cut taxes on fuel by Rs. 1.50 a liter, even though it can ill afford the hit to revenue: It’s already run through almost 100 percent of its targeted fiscal deficit in just the first six months of the financial year. A dozen states run by the ruling Bharatiya Janata Party – which looks vulnerable in fast-approaching state elections – announced that they were matching the federal government’s tax cuts with even larger ones of their own.

Such actions undercut the claim, made by officials earlier in Prime Minister Narendra Modi’s term, that they’d effectively deregulated fuel prices. More important, the approach is schizophrenic. Making imports such as fuel cheaper for consumers will just increase import demand, meaning more Indians will want to exchange their rupees for dollars.

To stabilize the current account deficit and the rupee, the government should instead be incentivizing Indian consumers, through the price system, to reduce their demand for imports. Ironically, it’s doing precisely that by repeatedly raising tariffs on imports other than fuel.

The unfortunate truth is that the government is simply being buffeted by politics one way and the other. An opposition campaign about high fuel prices appeared to be gaining steam, so the government lowered them. Social media was laughing at the rupee’s fall, so the RBI was pressured to step in. Jobs aren’t being created because manufacturing in India is still uncompetitive, so tariffs are being raised to force import-substituting factories to open. Any government that thinks it can control tariffs, the rupee and inflation, while containing the fiscal deficit, is in for a nasty surprise.

The political fallout of a sliding rupee and higher fuel prices is particularly problematic for Modi because his election campaign in 2013-14 was memorably brutal about the similar predicament in which the last government found itself. And, when global oil prices fell after he was elected in May 2014, Modi famously took credit. He’s got few sympathizers now that he is, effectively, facing exactly the same chorus of complaints that he himself orchestrated five years ago.

There’s blame to go around, though. Opposition leaders demanding cheaper fuel and a stronger rupee, and government officials pretending they can provide both, are all perpetuating harmful myths about the economy. Meanwhile, the core problem is ignored: Indians’ addiction to cheap imported fuel is the economy’s greatest structural weakness. Whenever oil prices go up, the rupee will have to slide; fuel prices will have to rise relative to others; and the central bank will have to worry about inflation.

There’s only one way out: Invest in renewables, in dams, in public transport and in a genuinely effective social safety net instead of subsidies. Accepting an addiction is the first step to fixing it. We haven’t quite gotten there yet.- Bloomberg 

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2 Comments Share Your Views


  1. A wonderful anslysis of events judging the outcome of 2019 elections. The BJP will win more seats provided
    First and Foremost They Should Not to Act as though they have the chirag of Allahdin with them and make Promises which can NEVER Be Achieved. Total Immaturity shown at the time of making promises in 2014. At least now they should refrain from making such false promises
    2. It’s leaders should exercise restraint over the comments of the Congress leaders w.r.t the comments made as regards our Prime Minister Any act of rebuttal is making BJP further go down the dungeon. If the BJP maturely handles such atrocious comments , I think they will be able to score over the immutarity showed
    2. The inflation factor is the second aspect
    3. The fuelling of the Banks to come out of the red and the partisan attitude towards the defaulting industrialists who have swelled the NPA of the commercial banks will cost them dearly.
    4.They should stop the blame game of financial Scams instead come up with mechanisms and results to show the country that they mean business in bringing the scamsters to book
    5. The issue of Black money is like searching a way out in a maze. If they have the list and they have nothing to fear then they should publicise the same. Unless bringing this in the print media may cost them from being ousted.
    I think their spokes persons must behave maturely in any debate in a disciplined manner rather than shouting like school children.
    They should understand that even though we are having a low literacy rate , yet the no.of such prople who get swayed by fire statements is dwindling and today even such people are now understanding the gimmicks involved. In the long run exercising restraint, making a point of view more maturely and stating with facts will be better accepted rather than the cacophonic statements.

  2. There is another way of looking at fuel prices from a political – economic prism. When oil was surging to $ 140 a barrel, UPA II, already facing headwinds, was reluctant to raise fuel prices. It asked ONGC to share the subsidy burden, hollowed out the finances of the Oil Marketing Companies, issued oil bonds which were a total accounting fudge. This could be called bad economics trumping politics. 2. The situation today is different. 1.50 from GoI ( actually out of a divisible pool ), 1.00 from the OMCs, 2.50 from BJP ruled states, the relief of five rupees cannot be dismissed as fiscally irresponsible populism. The welter of duties and taxes has been continuously raised, by both Centre and states, in a rare burst of cooperative federalism, to mop up the windfall gain from falling crude prices, all the way down to about $ 30. Instead of households burning cheaper imported fossil fuel with abandon, let us keep prices high and use the money for all the wonderful work we are doing, which does not include any creation of capital assets. Had this bonanza not materialised, the government(s) would have either found other sources of revenue or cut back on less essential expenditure. Now that prices have risen to about $ 80, it is equitable for government to shed this temporary gain and get back to alternate resource mobilisation. 3. Simple test. Compare the tax element included in the retail prices of diesel and petrol with other developed and developing countries, even ignoring vast differential in per capita income, to figure if Indian consumers are or are not being gouged.


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