Indian fuel reform

Indian politicians have long deemed the country’s fuel subsidies too hot to touch. The last time reform was attempted – eight years ago – it was swiftly aborted after fuel prices shot up, sparking public protest. Now, the government of Manmohan Singh has waded back into the fray, ending state control over petrol prices and promising to phase out subsidies on diesel. Although this has already prompted a fuel price strike, Mr Singh vows to battle on.

He is right to do so. There is no alternative but to cut the fuel subsidies. India is running an unsustainable deficit of 5.5 per cent of GDP. It simply cannot afford to continue spending nearly $20bn on subsidising fuel – much of which India has to import from abroad. Moreover, that number is likely to rise fast as more and more middle- class Indians buy cars. Sales of motor vehicles are increasing at about 30 per cent a year. It is simply absurd for the state to subsidise the shiny new status symbols of the affluent middle class.

There is some acceptance of this among the urban elites. Despite the strike, called for political reasons by the opposition BJP and the Communists, the prevailing mood is one of resignation.

Nonetheless, this will not be an easy ride for Mr Singh. The reforms come at a time of rising inflation. That will make the rises in fuel prices harder to absorb. That is especially the case among poor people, for whom food price inflation (running at nearly 17 per cent) is a particular hardship.

Mr Singh’s reform is designed to protect the needy by keeping subsidies for kerosene and cooking gas – the fuels on which they rely the most – although prices have been pushed up. But this is not a satisfactory solution. If he persists in keeping kerosene prices cheap while letting those for diesel rise, this will simply increase the opportunity for arbitrage between the two. Cooking fuels will be redesignated by traders as a diesel-substitute for automobiles and tractors.

The government must therefore not let things rest where they stand. If the move towards market pricing is to stick – and be extended – a way must be found to replace general subsidies of fuels with targeted assistance to help poor people to pay for the fuels they need.

True, there is no simple mechanism for achieving this at present – although the government has talked about introducing a national ID card scheme. But Mr Singh has a strong incentive for finding such a mechanism, and introducing it quickly.