NEW DELHI: Although deregulation of diesel prices has been in the works for a while, the government bit the bullet around 8 pm on Wednesday when a decision was taken to place the politically knotty proposal before the cabinet committee on political affairs the next morning.
The approval of the Cabinet Committee on Political Affairs is seen as a major step to prune a subsidy bill playing havoc with government finances and is a signal to woo foreign investors ahead of road shows in Asia and Europe and the World Economic Forum's annual meeting at Davos later this month.
The government signaled its determination by defying conventional wisdom that the unpopular decision - that follows a recent hike in rail fares -- would not be taken before the Congress brainstorming session due to begin on Friday.
The unambiguous message the government has sought to convey is that it is serious about nipping the fiscal deficit and hopes its actions will convince ratings agencies that India is taking energetic steps to remain a viable investment destination.
There is a consensus in government that although India remains a relatively attractive investment option in view of Eurozone's problems and slow growth in the US, it must show the resolve to take steps that will improve FDI inflows.
Tackling red tape, reducing corruption and de-stressing government finances are seen as key to boosting investor confidence at home and abroad. The oil subsidy is reportedly in the region of Rs 1.5 lakh crore and the sum earmarked in the 2011-12 budget was consumed settling the previous year's bill.
With disinvestment struggling and fresh auction of 2G spectrum proving a damp squib, the government has little choice but to attack the subsidy on diesel despite the obvious inflationary implications of such a decision.
Disregard for the Jaipur 'chintan shivir' indicates the Congress leadership understands the urgent need to raise fuel prices.
Financial analysts and the markets welcomed the move to reform the oil sector and the government's eye is fixed on finance minister P Chidambaram's tours to woo foreign investors when he travels to Hong Kong and Singapore and a little later to European cities.
By taking some tough calls, the government will hope to convey the right signals ahead of the bwhich will be its last such full-scale exercise before the 2014 general election. The budget will not be bereft of populism, but the giveaways are likely to be limited and focused on key voter groups.
An increase in diesel rates will bring the fuel closer in price parity to petrol and would be seen as an environment friendly decision if the mitigation costs are calculated over the long term.
Hike in fuel price a signal to ratings agencies, investors
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Hike in fuel price a signal to ratings agencies, investors
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Hike in fuel price a signal to ratings agencies, investors
