A painful shift from APM to MDPM
After almost two decades of reforms, finally, India saw partially shift from the regime of administrative price mechanism (APM) to market driven price mechanism (MDPM) in the oil sector. It is not surprising at all. This is a very natural and inevitable outcome of the opening of the country and ending of the protectionist regime in the light of the globalization. In fact, the shift from APM to MDPM was expected long-time back after wiping out of oil-pool account. The straight-forward rational behind the shift is to reduce the subsidy burden of the Government so that the non-planned expenditure could be curtailed and the growing gap of fiscal-deficit could be reduced significantly. It is pertinent to note that the fiscal-deficit is the health indicator of a nation. A high fiscal-deficit ridden economy is suppose to be a financial blot for a country to deal with other countries.
It gives a clear-cut impression that the country has lesser ability to pay-back after borrowing. Therefore, managing the high fiscal deficit is one of the primary objective of the fiscal policy of a country. In a globalised world, the reputation of a country depends upon the creditratings of the professional bodies and it shapes the confidence of the foreign institutional investors. The foreign investment in both forms: portfolio and direct is a must for the growth and development of a developing country. The subsidies given by the Government not only increases the fiscal deficit but also discourages the multilateral trade regime in the form of protective policies. In this way, the dismantling of APM is a welcome and productive step. But at this juncture I am not agreed with the timing of this decision. No doubt, the deregulation of prices is a mandatory dimension of governance. But to me constitutes only one-aspect of this multi-dimensional world with infinite attribute and compulsions.
To me, to provide good governance to the people is the most challenging ability of human being. The fate of good governance depends upon the act of balancing and sense of anticipation of the Government machinery. The decision-making process decides the intention of the Government and its execution determines the level of its efficiency at the functioning level. The duties and responsibilities of the people’s representatives, the bureaucrats and the advisers have to coordinate the resources of the state and the requirements of the common people. In order to sustain the presence of the governance in the lives of people, the policies and priorities are made and implemented at every level. By and large, a human being wants two things from the Government: food security and protection to one’s life. For this, the people pays the Government in the form of taxes and abides the rules formulated by it. This is another indispensable aspect of governance and government’s commitment towards its people. In other words, the government has to face twocontradictory situation and has to find out a plausible solution. In fact, finding out a solution in such a situation is the most challenging aspect of governance and for this extraordinary vision and clairvoyance is needed and under this respect, the decision could be deferred for the some more time. The decision to deregulate prices was part of the recommendations of an expert group headed by Planning Commission member Kirit Parikh, in February 2010. The shift to MDPM from APM has a lot advantages like there will more competition amongst the oil companies, the foreign companies will come back and once again restart their activities in India, etc. The oil-marketing companies (OMCs) are expected to recover as much as Rs 24,000 to Rs 28,000 crore in a year. The burden of under-recovery for the oil-marketing companies on account of four administered products petrol, diesel, liquefied petroleum gas and PDS Kerosene oil - is estimated at a staggering Rs. 80,000 crore. The decision will help curtail under-recoveries on cooking fuel by around Rs 14,900 crore to Rs 21,600 crore. It has been analysed that the upstream segment companies would require to contribute around a mere Rs 1,600 crore per annum with the government taking up around Rs 20,000 crore of subsidy burden. Further, the bold reform would result in lower fiscal and revenue deficit, thereby helping in reducing inflation rate in near future. According to Murli Deora, oil minister, the underrecoveries of Rs. 1-lakh crore last year were unsustainable and affected the Budget available for the government’s other welfare projects. The move, which is likely cap the fiscal deficit below the projected 5.5 per cent for the current year and free up the revenues for other productive programmes.
It gives a clear-cut impression that the country has lesser ability to pay-back after borrowing. Therefore, managing the high fiscal deficit is one of the primary objective of the fiscal policy of a country. In a globalised world, the reputation of a country depends upon the creditratings of the professional bodies and it shapes the confidence of the foreign institutional investors. The foreign investment in both forms: portfolio and direct is a must for the growth and development of a developing country. The subsidies given by the Government not only increases the fiscal deficit but also discourages the multilateral trade regime in the form of protective policies. In this way, the dismantling of APM is a welcome and productive step. But at this juncture I am not agreed with the timing of this decision. No doubt, the deregulation of prices is a mandatory dimension of governance. But to me constitutes only one-aspect of this multi-dimensional world with infinite attribute and compulsions.
To me, to provide good governance to the people is the most challenging ability of human being. The fate of good governance depends upon the act of balancing and sense of anticipation of the Government machinery. The decision-making process decides the intention of the Government and its execution determines the level of its efficiency at the functioning level. The duties and responsibilities of the people’s representatives, the bureaucrats and the advisers have to coordinate the resources of the state and the requirements of the common people. In order to sustain the presence of the governance in the lives of people, the policies and priorities are made and implemented at every level. By and large, a human being wants two things from the Government: food security and protection to one’s life. For this, the people pays the Government in the form of taxes and abides the rules formulated by it. This is another indispensable aspect of governance and government’s commitment towards its people. In other words, the government has to face twocontradictory situation and has to find out a plausible solution. In fact, finding out a solution in such a situation is the most challenging aspect of governance and for this extraordinary vision and clairvoyance is needed and under this respect, the decision could be deferred for the some more time. The decision to deregulate prices was part of the recommendations of an expert group headed by Planning Commission member Kirit Parikh, in February 2010. The shift to MDPM from APM has a lot advantages like there will more competition amongst the oil companies, the foreign companies will come back and once again restart their activities in India, etc. The oil-marketing companies (OMCs) are expected to recover as much as Rs 24,000 to Rs 28,000 crore in a year. The burden of under-recovery for the oil-marketing companies on account of four administered products petrol, diesel, liquefied petroleum gas and PDS Kerosene oil - is estimated at a staggering Rs. 80,000 crore. The decision will help curtail under-recoveries on cooking fuel by around Rs 14,900 crore to Rs 21,600 crore. It has been analysed that the upstream segment companies would require to contribute around a mere Rs 1,600 crore per annum with the government taking up around Rs 20,000 crore of subsidy burden. Further, the bold reform would result in lower fiscal and revenue deficit, thereby helping in reducing inflation rate in near future. According to Murli Deora, oil minister, the underrecoveries of Rs. 1-lakh crore last year were unsustainable and affected the Budget available for the government’s other welfare projects. The move, which is likely cap the fiscal deficit below the projected 5.5 per cent for the current year and free up the revenues for other productive programmes.
According to Kaushik Basu, Chief Economic Advisor to the Finance Ministry, the government’s decision to raise the fuel prices will push up the monthly wholesale price inflation by 0.9 percentage point. Inflation is already in double digits as it rose to 10.16 per cent in May from 9.59 per cent in April due to elevated food prices and certain manufactured items like metals turning expensive. At this point of time, when food inflation is close to 17 per cent, the government has to calculate the cascading effect of deregulation on the lives of harassed people living on margins. The Government has to consider that petroleum prices is the most sensitive price index and any change at the price-level, every walks of life is concomitantly affected. The transportation cost would be increased and thereby the cost of foodgrains subsequently going to be affected. There is no debate over the evils of s u b s i d y . Subsidy is a curse for a developing economy. We all know that it is detrimental to growth and progress. Subsidy is the most classical paradigm of conspicuous consumption. We know that subsidies are an effective means to mitigate the effects of extreme inequalities and to protect the infant indigenous industries. But we know that it has not been done. We know that the food subsidies have been monopolized by hoarders and black marketers; the oil subsidy has been used by businessmen’s’ generators and limousines; the education subsidy has been utilized by the haves and the fertilizer subsidy has been availed by the producers/ suppliers and kulaks rather than the actual farmers. The Discussion paper on subsidies has categorically pointed out “a significant portion of subsidies in higher education is appropriated by the middle to high income groups because of shortage of seats cleared by a quality based screening in the shape of entrance examination, interviews and group discussion.” Subsidies are becoming useless and wastage of scarce resources and lead to greater inefficiency. Even the Economic Survey of India 2008-09 has strongly advocated the change of regime from APM to MDPM. The Economic Survey said “The boom in oil and other energy prices during 2008 ended in July 2008. Thereafter global prices declined rapidly to around US$ 40 per barrel. This was expected to be a temporary respite with oil prices likely to rise along with a recovering global economy. Though the time it would take for the recovery to start was very uncertain, it was clear that the respite would be temporary and that this provided a golden opportunity to reform the pricing and control system. It was therefore imperative that petrol and diesel prices be decontrolled so that buyers were aware of the opportunity cost of oil imports and thus contributed their mite to economizing on the use of refinery products. As long as domestic prices remained below the cost of imports, demand would continue to grow, accentuating the negative impact of the terms of trade effect on national income. In simple words, such a situation is a form of foreign taxation of national income, with more tax being paid the more oil/petrol/diesel we consume. As the low prices of oil has provided a temporary window for costless decontrol of petrol and diesel, this window must be utilized at the earliest. Other elements of energy policy, such as open access to power, decontrol of coal also need to be addressed to have a viable and longterm solution to our dependence on foreign oil and the debilitating effect of power failure”.
At this point of time, it has to be brought to the notice of the government that the same decision should have been implemented in 2007-08 when the inflation was under control and the growth rate was satisfactory but the decisions were deferred. To me, the sense of proportion has a bigger role to play in decision-making but unfortunately the sense of timing of the decisionmakers is not up to the required level. The success is always governed by the sense of timing and time management. Besides that the unfinished agenda of the secondgeneration reforms has also confused the process of globalization. A lot of reforms are still pending or delayed and as a result of this the degree of relative deprivation is increasing and the government is not able to provide enough space to the vulnerable sections of the society. The social security issues have yet to be resolved in India. In this process, the very duty of the government is neglected and the presence of the government in day-to-day life of a common man is dwindling. This has created room for a sense of insecurity and the antisocial elements get benefited out of this and a political vacuum is created in the minds of people, which is giving air to parallel governance. Any decision, irrespective of time and context is bound to produce confusion and this affects the public opinion and the parochial parties in the name of caste and region to gain undue advantage and unleashes forces of political instability which is detrimental to both growth and policy making on long-term basis. The decision is definitely a welcome step but time for it, is not correct for such a major step and it should either be done three years back or a few months later, especially after the monsoon and new crops. The hastened step might take an ugly turn and jeopardise the whole process of reforms. I suggest that the government must go for massive public awareness about the decision-making and I request media to present a very real picture about the pros and cons of this decision and avoid unnecessary projecting the implications of the decision. Afterall, a new system needs altogether different mindset.
“Sun neither rises with youth nor sets with old age; Sun neither rises with success nor unsuccess; To me, sun rises every morning and sets at every evening.”
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