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The real reason why the Modi Govt isn't panicking over rising petroleum prices and the devaluation of the rupee
A hike in fuel prices always draws unwarranted attention and the opposition parties use it as leverage. At the moment, the prices of petroleum are very high and have been steadily rising on a daily basis with no immediate reprieve in sight.

The government's excuse is that global factors are responsible for the price rise along with the rupee becoming weaker against the dollar. It's interesting to note that although the rupee has appreciated in comparison to major global currencies, the problem remains the same as most international transactions especially crude oil are done in US dollars.

Recently, the Congress-led opposition observed a Bharat bandh. You can't blame them for playing politics over the issue. When the UPA was in power, BJP-led NDA too had organised many bandhs and criticised the erstwhile government for both the petroleum price rise and fall in the rupee's value. Some BJP supporters compare the prices of petroleum and rupee's devaluation during 2004 when the Vajpayee-led NDA ended its tenure with the price of petroleum and rupee's value when UPA left power in 2014. I don't think this comparison is valid as it would like comparing the salary you were being paid in 2004 with the salary you are being paid now.

But what can the Narendra Modi-led government do to control the petroleum prices? Should he reduce the excise duty? Should he bring petroleum products under the ambit of GST? The ruling government has straight away rejected a cut in excise duty. The reasons are understandable. Any revenue cut will widen both Fiscal Deficit and Current Account Deficit (CAD). But then, should the government continue to ignore public outcry over rising petroleum prices?

I think that the Narendra Modi-led government is trying to make political sense by smart economic moves. An excise cut will negatively impact CAD and Fiscal Deficit thereby affecting the economic growth. If the government wants to maintain the Fiscal Deficit after a cut in excise duty on petroleum, it will have to cut funding towards developmental projects and social welfare programs.

The UPA during its last two and a half years of tenure, in fact, got trapped in trying to maintain Fiscal Deficit by cutting the funding to developmental projects and social welfare programs. During that time not only very low excise duty was imposed on petroleum products but significant subsidy was also being given to keep the petroleum prices under check. However, the result was catastrophic. Neither the Fiscal Deficit came under control nor CAD. Furthermore, there were no funds left for running welfare and developmental projects leading to crippling of the economy. The Manmohan Singh government wanted to strike a balance between economics and politics but failed miserably and as a result the Congress' seats were reduced to an all-time low in the Lok Sabha during the 2014 general election.

A cautious BJP is taking steps very cautiously. The Modi government doesn't want to stop any developmental or welfare projects, and nor does it want to widen the deficits. Thus it will stay defiant in not cutting down prices. Interestingly petroleum prices never became an electoral issue. Despite the hike in petroleum prices neither has the sale of new vehicles reduced nor the consumption of petrol-diesel. Luckily, prices of all other commodities are low and affordable in comparison to 2014. Thus, the BJP government can afford to ignore the petroleum price for now.

It may reduce a bit during next year 'Vote on Account' budget just before the general election 2019, but don't think any further reprieve. Let us see how Modi government find out to face this politically maintaining good economics.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of merinews.com. In case you have a opposing view, please click here to share the same in the comments section.
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