The Gold Standard | After ten years

Reached Chennai last night to teach a 15-hour Executive MBA course on International Finance at the Great Lakes Institute of Management. Held the first session yesterday. The recent increase in USDINR (=rupee slide) was a good topic to begin the discussion on exchange rate determination, on the role of fiscal deficits in ‘crowding out’, in creating inflation risk and in creating the risk of backdoor monetisation, etc. Watched the ‘New Generation’ (‘Puthiya Thalaimurai’) TV in the morning before going to the class. The discussion on the Euro crisis was good. A Professsor of Commerce (did not wait long enough to see his name and institutional affiliation) spoke quite well on the German-Franco tussle. In the afternoon, saw put it (the clash, I mean) on its front page on the Web.

In the afternoon, watched the Chief Minister of Tamil Nadu deliver a good speech in chaste Tamil on why she had to hike the price of bus fares (not revised in many cities in Tamil Nadu for ten years!) and the price of milk. She spoke at length on how the previous DMK Government had bankrupted the State Electricity Board by procuring power at high cost from the market. Well, that alone would not have bankrupted the SEB but for the fact that user tariffs have not been revised for farmers or other subsidised users. She left that unsaid.

While her justifications for the moves were political, the moves were needed. But political reactions have been predictable. Sadly.

The Government of India had cut the price of petrol the day before citing a slight decline in the price of crude oil and a slight firming of the Indian rupee in October! I thought it was a bizarre move and a friend explained it as a tactical move to win broader support (or passive resistance) for a possible de-regulation of the prices of fuel products. I hope he is right. I doubt though. I do not know what the GoI (sorry, oil companies) would do in November since the rupee had weakened quite a bit already.

This explains the rationale (?!) behind the decision well:

Executives in IOC, Hindustan Petroleum and Bharat Petroleum said that a fuel price reduction was a must to retain pricing freedom. The government had freed petrol pricing in June last year, but companies only raised its prices 13 times despite fluctuations in global crude oil prices.

Executives said that authorities had cautioned them that they could lose pricing freedom if they go on increasing the fuel price. They fear that constant upward movement of petrol rates will give an excuse to the government to take away their pricing freedom, companies’ executives said. (Link)

It is fine to explain many of these things as needed for political survival – and I understand that – but the heart does yearn for something different, at least occasionally.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.