Chillin' out till it needs to be funded
This is an INDIA specific analysis in that though global trends affected may also be analysed, the document analyses the base policy and market structure changes in India fueled by the reform mechanism.
As of last year, we expected the government of India to bear the costs of exploration till the deigned 25% of domestic consumption and oil marketing and distribution from the import bill for the other 75%. This bill was budgeted for much less and expected to come to $17.5bn in 2010. Given the spiraling fiscal deficit and political compulsions of the government, once 3G revenues to the extent of a similar $15bn cam in it was deemed likely that the EGOM would also shy away from deregulating petrol or even in the best case not take up hikes in regulated motor oils like diesel and ‘cooking’ oils like kerosene. However, Friday’s mid-market moves have slashed its subsidy bill by a $8 billion in one shot, bringing oil under recoveries in diesel to the same level as petrol earlier. With this stroke, the government is richer by a Rs 1 Trillion, and with a new Rupee symbol, ready to close the chapter on subsidies and social reform that should never have been part of the same soup.
Even in Diesel, IOC alone with more than 30% retail fuels market share, carries bills worth $2.5 billion home, even now.
The next challenge of course is to rein in the basis of all discontent, and even international economic instability, that of inflation. Research analyst colleagues in broking outfits have already estimated the inflation impact of the hike at 100 basis points on the average inflation bill. The immediate impact would be higher and in fact the average rate may inch much higher causing the rupee’s strengthening moves to be consigned to history. A study of the China case at a later point may prove more instructive in proving it but I rather doubt the correlation between the expected strengthening of the currency and the country’s fiscal health as immediate features like current account balances and capital flows ( esp if made convertible) being significant movers and able to break the back of any country.
Nevertheless, a similar hard hat measure would be to cut the grass from under one’s feet and bite the capital convertibility bullet. Being busy right away, I may not be able to contribute more in-depth analysis on each such economic subject, but as the debate hots up we would make sure that the correct stance and the correct reform is chosen for India’s long term success.