The usual pro-forma and stereotypical screams and protests – which have completely lost value – against the “deregulation” of diesel prices at the retail level and the capping of the LPG cylinders first at 6 and later increased to 9, completely diverted attention away from the smartest and biggest parts of these reforms. For no one has fully understood the really bold sub-texts of these reforms. In hindsight, it would appear that the government (read: Chidambaram) was really smart in the way it played its cards.
Take the diesel price increase. Most media attention, and political opposition, was directed at the very minor price increase at the retail level. To our TV anchors who crave for any and every TRP they can grab, there was no difference between the 50 paise price hike announced this time and the 5 rupee hike a few months back. Their rants were the same; the panels they put up were identical and even the “verdict” they pronounced were the same. The government is heartless and is bleeding out the middle class. Blah, blah, blah. None of these blokes however understood that more than the retail price hike, the larger move announced by Chidambaram was that bulk buyers would have to pay market rates immediately. I keep referring to Chidambaram here though the announcement was made by Moily, the Petroleum minister, because Chidambaram’s hand is clearly behind these smart moves.
Now just see how smart this move is. The biggest beneficiaries – the undeserving kinds – of the diesel subsidy provided by the government are the bulk users. Those who use diesel gensets to power telecom towers and transmission equipment, the Railways, the bus companies….and even defence forces as well. These users will now have to pay some Rs 10 more per litre with immediate effect. How much media attention has focused on this? Negligible, if at all. These are the big daddies of diesel consumption (apart from farmers who use diesel pump sets), and all of them have been made to pay full prices in one go. This is huge. The impact of cutting diesel subsidies to these users will be enormous. If Rs 90,000 crores is the diesel subsidy, then at least a fifth of this could be cut by simply making such bulk users pay the full price. The government quietly and cannily hid this bold move within the more sensitive 50 paise a litre retail price hike – knowing fully well that the ignorant media and opposition would take the bait.
Again, take the capping of subsidized LPG cylinders at 6 announced in September last year. By imposing a cap, rather than reducing the subsidy per cylinder (it was reduced only marginally), the government showed a rare canniness, again bearing Chidambaram’s mark. The cap hit bulk users – the restaurants, car users (many use LPG), industrial outfits – as it should. Again, media attention was solely on how the capping affected the middle class. The government really didn’t worry too much about it. It promptly increased the cap to 9, stymieing most of the protests. But the big users – or abusers as we should call them – will still have to pay market rates. Smart, isn’t it?!!
Likewise, on the Vodafone tax issue, has anyone noticed how smartly the government has moved from making it a prestige issue to recovering “only the principal” and “waiving off the interest”. Both parties appear to find this solution acceptable. Voda must have “provided” for the principal+interest in its books, and is thus now a lot more amenable to a settlement. It also realizes that India is too important a market to fight the government. Also, in an accounting sense, if it can get a waiver on the interest part, it can “write-back” this in its books. For a CEO, that means higher profits! For the government, getting the principal shows its determination in enforcing what it thinks is right and also helping improve the fiscal situation.
A lot of smart thinking has come about this government since Chidambaram has taken over as the Finance Minister. Chidambaram has combined political savvy and good economic thinking; and stayed focused on meeting the end objectives rather than on bothering about optics. He’s ok to make concessions in order to achieve the bigger goals. Getting the principal from Voda is more important than getting embroiled in a global litigation.
It is the same savvy that one is now seeing in the telecom auction process as well. The government has lowered the reserve fee quite significantly, although industry players are complaining that it is still not enough. CDMA reserve fee has been halved; and GSM by 30%. The government made a mistake in the first instance; but its willingness to correct the mistake is typically the style that Chidambaram is noted for. There is no ego here; no false pride. A mistake was made; and a correction was required. Period. It is my belief that the auctions will be largely successful in March, and the government will meet its Rs 40,000 crore target for the fiscal year.
The ultimate challenge for Chidambaram is RBI governor Subba Rao. The RBI governor seems unrelenting. How Chidambaram will be able to push him a bit and cajole him as well will determine whether the RBI lowers rates or not. And upon that will hinge how the economy rebounds. Given Chidambaram’s track record, I think he will succeed.
The real truth is that Chidambaram has made a big difference to the UPA government’s performance. He became Finance minister in July. By September, the UPA had mustered enough courage to pass through tough reforms. Chidambaram is politically and economically savvy and his mark is clearly visible now…..