India's oil subsidies

Images from India, which just last month celebrated 50 years of independence, are gloomy: politicians leading blockades to protest rising prices of oil products, poor people worried about fuel for basic needs, upstart manufacturing executives complaining about new expenses.

But the trouble didn't begin Sept. 1, when a politically weak government raised prices of gasoline, diesel fuel, and cooking gas. The trouble began those many years ago, when India's newly independent government veered toward socialism. The ruling United Front this month is just cleaning up after central planning.

Elaborate scheme

Oil products belong to an elaborate scheme of subsidies that developed in state-centered India over the years. The finance ministry estimates that subsidies in 1994-95 represented 10.7% of gross domestic product (GDP). Dismantling them is part of a program of economic liberalization that the government began in mid-1991 and that absolutely-for the sake of India and its 1 billion people-must continue.

It won't be easy. Correcting mistakes never is. The key is to acknowledge past errors and persevere in hope for a better future. The government of Prime Minister Inder Kumar Gujral last week seemed resolved to stick with its decision, in suspense since June, despite the protests.

It has no better alternative. The government owes Indian oil companies $5.3 billion for selling products cheap. There are people in the world who still think that a relationship such as this can go on forever since it is "the state" that sustains the loss. For instruction, they should look where India sought guidance for so many years: to the now wrecked economy of the old Soviet Union.

Indians can take heart in quick yields from the early stages of reform. Until last year, GDP since 1991 had grown at about 6%/year. In the 1960s and 1970s, it had loitered at just 3.5%/year before rising to nearly 6%/year in the 1980s under the unsustainable stimulus of heavy government borrowing. It was partly a balance-of-payments crisis that pressured the long-ruling Congress Party to launch reform in 1991.

The program is ambitious. Eradication of subsidies is just part, albeit a crucial one, of the effort. With wavering diligence, the government also is trying to restore fiscal health, privatize industries, modernize labor practice, equitably share tax revenues with states, fight corruption, rationalize trade policy, fund infrastructure, and simplify India's infamous labyrinth of licensing requirements, among other things.

At the same time, it must survive. The United Front is united mainly by resistance to the Bharatiya Janata Party (BJP), which trounced the Congress Party in the May 1996 elections. With Congress splintered and other parties mostly aligned with specific regions or castes, the BJP is the strongest and perhaps only party that can claim nationwide appeal. But its Hindu nationalist orientation clashes with India's tradition of secular rule and has so far served as a rallying point for opposition.

As long as that is so and secular politics remains decentralized, fragile coalitions will govern India. Indeed, some blame for last year's economic pause goes to political uncertainty during the transition from short-lived BJP rule to the current regime. In such a volatile political climate, raising prices of essential commodities in pursuit of abstract benefits requires conviction and courage. The Indian government deserves credit for putting economic health ahead of political expediency.

Unavoidable hardship

If the effort survives, oil prices in India will reach market levels by 2002. Hardship is unavoidable and must be alleviated to the extent possible. But subsidies cause more harm over time and cannot last.

For the rest of the world, India provides a lesson. Government manipulation of prices is painful to quit, even when the damage is evident, and it's best never to start.