The Hindu Business Line : Oil price and elections

Given the link between higher oil prices and rising inflation, if crude keeps soaring, inflationary conditions may precipitate the Lok Sabha elections.

Ranabir Ray Choudhury

At this juncture, the all-important question is: Will the price situation get any worse before it begins to turn around? The issue is important not only for the sake of the average citizen, who is already paying through his nose for his daily, staple requirements, but also for the politicians whose one objective, as a tribe, today is to occupy the seat of power.

For the latter group, much, as regards their present political behaviour, will depend on the answer, for their agenda differs from one group to the other. If the price situation is expected to get worse in the coming weeks, the pressures on the Government will increase, which implies that the UPA regime would find it even more difficult to defend itself before the electorate than now.

Lok Sabha elections

Since the next Lok Sabha elections are scheduled for the middle of 2009, it could be argued that, given this expectation, it would make sense to call for a dissolution of the House now rather than let the cacophony of protest grow even louder later. If, on the other hand, inflation is expected to level off sometime in September, then it would certainly be wiser to wait for the improvement, take some claim for it, and then call for dissolution in January or February.

For those in the Opposition, the response, normally, should be just the opposite. If the price situation is expected to worsen, then one should wait for the time when the ruling outfit is even deeper in trouble vis-À-vis the electorate. If, on the other hand, prices are expected to level out towards the end of the year, an election campaign before that would appear to be more sensible, which would mean a dissolution now would be the best thing to happen for this group.

This is the basic relationship between prices and the next Lok Sabha elections which, of course, has to be tempered by other inputs such as the nuclear deal with the US, and the views of the parties forming the different groups involved (namely, the ruling coalition and the Opposition groupings). In other words, if the Prime Minister is bent on getting the next step on the nuclear deal — the approach to the IAEA — implemented, then obviously, he could be facing an election sooner rather than later. As regards some of the smaller parties on the political landscape, each has its own agenda vis-À-vis the electoral scene, some preferring quick elections while others would like as much time to elapse as possible before they are called.

If the link between current Indian inflation and the world crude price is very strong at this juncture, the obvious thing to expect would be a further rise in internal inflation if the crude price continues to soar (or does not decline below, say, $130 a barrel).

Crude prices

The chances are that even if the crude price remains more or less at the $130 level, price inflation is set to rise even further in the next week or two because of the lag in the impact of the steep increase in domestic fuel price announced by the Government in the first week of this month. Costs are expected to rise all around with import-linked costs having also gone up with the decline in the rupee’s value vis-À-vis the dollar.

One way of viewing the plight of the UPA Government is to describe it as a sitting duck, falling victim on the price front to movements over which it has little or no control.

There is of course the view that the economy was already in an over-heated stage following the impressive run of high growth over the past five years, the inference being that a sharp price increase was on the cards anyway, and that the world crude price behaviour was only a trigger.

If this is true, then the Government of Dr Manmohan Singh, himself a respected economist, would have to bear a part of the blame for the current price situation — specifically for not taking measures to control the “over-heating”. But is the description of the real economy being over-heated correct?

To answer this question, one has to consider, among other things, whether industrial capacity is falling behind consumption demand, a quick survey of the essential parameters indicating that this is not yet the case. Moreover, the tax-proceeds figures are still at a comfortable level which suggests that the economy is booming, and intrinsically so.

Measures to rein in prices

So what can the Government do to control the runaway price situation, that is, if it can do anything at all which, among other things, can have a political fallout? Raising interest rates is one conventional method of controlling demand, but it is not certain whether such a step will have the intended effect on prices at this juncture.

After all, the present price scenario does not quite answer to the description of being demand-controlled. On the contrary, there is a clear danger of costs being jacked up if there is any substantial rise in the interest rate which, after a time lag, could translate into price-pressure, not to speak of any deceleration in economic activity occasioned by the interest rate rise.

It is being said that supply-side management could help to douse prices, but this clearly focusses on the farm scene which, admittedly, is not unimportant but, at this moment, is probably not quite central to the price situation.

Edible oils, steel, cement, etc, can certainly do with an increased supply, but their availability has really not been at the bottom of the “explosion” in the inflation rate. Temporary administrative control of the price of naphtha, aviation turbine fuel, furnace oil, etc, could perhaps help a bit, but the impact would be far less than if the world crude price were to decline appreciably.

Is the adage “what goes up must come down” applicable to crude prices? If one considers the Iranian expectation that $150 will be breached by August, the signs are ominous. If so, then can one say that the chances of Lok Sabha elections being called sooner rather than later are stronger than is being generally expected?

An associated point of interest is: Will the rug be pulled from under the feet, or will the towel be thrown in?

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