Ending administered pricing mechanism had been pending for a decade almost but Government lacked the political will to proceed with it even at a time international oil prices were favourable, especially with a steep fall in the latter half of 2008 and hovering around 60 dollars a barrel for quite a few months. Currently, when UPA takes the plunge, oil prices are close to 80 dollars a barrel - not a great relief for India - and the argument that it is the right moment for reform will therefore not bear scrutiny. On the other hand, WPI inflation has been in double-digit since February though this Government has immunised itself to inflation, the issue proving too intractable even for its top economists. With some gung-ho as one-off 3G spectrum sales brought a bounty, it was a deliberate move to further buttress government finances.

At Toronto, the Prime Minister held up India's example for its crisis management in a resilient manner, and the latest move on fuel pricing would be duly commended by international institutions and investors. India leads the way at most international gatherings, as our media dutifully report. Here, Government has launched the reform by raising the prices of not only petrol and diesel but also kerosene and LPG for an overall reduction in the subsidies and cash support provided to public sector oil marketing companies for what are called their “under-recoveries”. Mr Mukherjee will achieve his fiscal deficit target of 5.5 per cent of GDP and it will be his moment of glory, thanks to the 3G bonanza,, the planned disinvestments and now launch of deregulation of oil product prices as part of lowering the volume of food and fuel subsidy.

Petrol pricing has been totally decontrolled, and diesel oil partially, with immediate increases of Rs.3.50 and Rs.2 per litre respectively. Government has broken the rule of not interfering with the price of kerosene, the poor man's fuel, and also slapped an increase of Rs.35 per LPG cylinder. Periodical rises are in store for all the products, the marketing companies determining the prices of petrol from now on - more frequently as oil prices are often volatile - and of diesel from a date likely to be set in the not distant future. That domestic oil product prices, with India's import dependence to the extent of 80 per cent, should reflect international price movements or to be market-related sounds logical. Oil Ministry officials contend that a major reform has been initiated and increased prices are “affordable” while the impact on WPI inflation would not exceed one percentage point.

The Finance Minister argues that the petrol and diesel price increases, the second after the budget imposts, were unavoidable and devoutly hopes the public would appreciate the rationale behind it. Kerosene and LPG prices will continue to be subsidized even with the latest increases. All this does not take away the reality that we are going through an unduly long phase of excessively high food product prices and double-digit WPI inflation. “Inflationary pressures will be moderated from mid-July, particularly food inflation. I do hope that by the end of the year, inflation will be moderated,” the finance minister has said. Earlier in his budget speech, Mr Mukherjee had prayed the God of Rain to make things easy. The monsoon, though setting in as forecast, has been wayward for most of June. This is another worry, as much for Finance Minister but much more for the people at large with its push factor for prices, given the cascading effect of rise in POL prices.

The Reserve Bank of India has for the first time in recent times gone behind the curve in delaying its “swift and prompt” response as the situation warrants. What more does it need when the entire Government and top economists see the need for RBI action. Dr C Rangarajan, former Governor of RBI, has repeatedly called for RBI intervention while telling Government to disgorge some foodgrain stocks in the market to dampen inflation.

However necessary some short-term measures may be to increase liquidity to meet temporary shortages, there is no credit crunch. Banks have expanded lending, corporates taking advantage when rates are still relatively easy amid raging inflation, while deposit growth has shrunk. For a year now, rates have been kept depressingly low, tantamount to depositors subsidising banks for their operations. At the beginning of June, bank credit had shown an year-on increase of 19.1 per cent as against 15.8 per cent in the earlier corresponding period. Aggregate deposits had declined to 14.3 per cent from 22 per cent while slowdown in time deposits is even sharper with half the growth of the previous year.

The Finance Ministry would no doubt favour a course of action by RBI which is more helpful to growth through credit expansion while seemingly tightening policy. When asked about a rate increase by RBI, Mr Mukherjee seemed to suggest that it might be in the third week of July “when they will factor in all the relevant aspects in deciding the monetary policy“ in the light of the first quarter review. Meanwhile, traders have warned of a 5 to 10 per cent rise in the prices of essential commodities following the fuel price hike.

In otherwise encouraging signs of economic bounce in 2010-11, with official GDP target at 8.5 per cent, industry had registered a growth of 17 per cent in April and exports have picked up in the first two months (April-May) though from a low base in 2009. Some sectors like automobiles and metals may be booming. India has the dubious distinction, along with China, of leading the growth of the rich of the world while India has the largest number of under-fed millions.

Continuing its two-year run, primary articles were 17.60 per cent higher in mid-June, which underscores what is happening at the ground level while Government limits its approach to headline inflation, itself now in double digit. The Planning Commission now expects farm sector to do much better in the 12th plan (2012-17) which would aim at 10 per cent GDP growth. (IPA Service)