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Reforms—it is the favorite topic of foreign investors while they look forward to consider taking or enhancing their financial investment exposure to an emerging economy like India. It is also a subject of considerable interest for a common man as also for the economists across the globe tracking the developments in the economy, with different objectives. A common perception and near-consensus of late on various types of reforms in the Indian economy has been that of general disappointment upon lack of conclusive push to realize the full potential and that considerable precious time is being lost in the process.

I will add a somewhat different dimension to the debate and present a contrarian angle to gauge the progress on the structural reforms at the foundation level of the economy as some of the ground-level interventions may definitely have potential to bring about large-scale changes in times to come.

The rationalization of fuel prices in a gradual but consistent manner over the last year or year and a half underscores gumption to take on a subject that has been treated as sensitive and sacrosanct for decades. The price of petrol for consumers has been near-pegged to the market, at NYMEX and Brent Crude levels of Rs.5,400 and Rs.4,500 respectively. Though exact math can be argued, this fact has gone almost unnoticed. The implication for the economy’s balancesheet is zero-subsidy on oil if global crude prices don’t rise. I maintain that long-term trend for oil is reversion to a new long-term floor at Rs.3,150-Rs.3,600. Hence, implication for the consumers is most of the pain might be over and one can expect street oil price to start softening over two years. Sounds insane!

The other large segments of subsidy within the oil basket are LPG, kerosene and diesel. The developments suggest these are being tackled with a different approach that is more long-term in nature. I sense imminent replacement of LPG with piped gas over the next decade. While interim measure of classifying the strata based on income and usage to reduce subsidy might meet with limited success, it would set things up for the future. The kerosene might get reduced from the system with strong environment rationale but would take the longest. Diesel, like petrol, has seen subsidy gap shrinking to 12-15 percent of consumer price.

The biggest silent initiative being implemented is the UID. It is the first most serious effort at use of technology as an enabler to address multiple national level subjects. Upon full implementation, it will help direct cash transfer to beneficiaries, thus hopefully eliminating the leakages which could still be a large percentage.

As one would observe, some of the above may not even get counted as serious reforms when mapped against noise associated with opening up of sectors to foreign players or to higher foreign capital. The deafening sound of the quiet work-in-progress currently would probably be heard in 2020. What do you feel?

BHARAT BANKA is the Founding CEO of a leading private equity firm.

©Entrepreneur September 2011

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Bharat Banka, diesel, fuel, kerosene, LPG, reforms