The UPA Government's gas bomb

This graphic shows that if the current trajectory of inflation continues, it may top 15% by the end of the year. Of course this is quite arbitrary, there is no theoretical support for this model.

There is an interesting discussion going on at offstumped. The folks over there have taken BJP to task for politicizing the gas price increases. This is a refreshing development, BJP supporters have taken a position directly opposed to the party's rhetoric (Mahangai Singh, LOL!). Unfortunately this is seldom observed in the Indian political space. Let alone the blogosphere, recent criticism of Congress even in the MSM was basically centered around the party's bad election management etc.

However, we did not find much to cheer about the Government's decision for a sudden hike to the tune of 10%. The general direction may be right as far as policy framework is concerned, but the timing, quantum of change and the modalities smack of nothing but political opportunism.

First of all, a few words about the inflation situation. As we noted in the previous post, the inflation figures are being revised at an unprecedented rate. The March 22 figures were just revised upwards to close to 8%. If the "revisions" continue at this rate, we may have already breached double digits and we don't even know it. Experts estimate the impact of the fuel price increase from 50 basis points to a full percentage point.

Even as people are busy editorializing the price hike, Sonia Gandhi has ordered Congress CMs to decrease taxes on fuel. There's talk of cooking gas rationing etc. The price of the most sensitive segment, i.e. Kerosene, remains unchanged.

It is quite clear that while global oil prices did contribute to the inflation, a substantial part came from gross mismanagement of the monetary policy. The UPA Government wanted to flood the country with populist spending as much and as fast as it could. The farmer loan waivers, already a whopping 60,000 crores, have been increased by 20%. The states have spent liberally too.

The fuel price hike is needed because UPA needs to finance its profligacy in an election year. Expect a very brisk implementation of the loan waiver program.

The UPA is all set to finish its term with a huge deficit, high debt to GDP ratio, runaway inflation and slowing growth.