Sanity has come late, but it has arrived –petrol prices raised by Rs 5 per litre, diesel by Rs 3 and LPG by Rs 50 per cylinder and taxes have been cut. We welcome the government’s move to comprehensively increase energy prices. Our PM needs to be congratulated on finally taking this step, and taking the country in confidence is the best way to do this. It seems that finally, at the fag end of his tenure, Dr. Manmohan Singh has arrived as a statesman. On the other hand, the BJP and other opposition parties (which it seems include most UPA partners!) are showing utter spinelessness by vehemently opposing a move which is the most natural outcome of international economic forces.

Let us face it, the government can only absorb minor economic shocks in a country as large as India. Try to absorb large shocks, and it will only end up funnelling them back into the economy at a multiple of the original.

This is also the right time for petro price reforms. First, let us stop imposing customs duties on petro imports on an ad valorem basis. That only increases the shocks into the system and is pro-inflationary. There is no reason why import duties on petroleum (which should be there) cannot be on a volume basis. Two, clean out the subsidy regime, stop favouring diesel, target the poor households better etc. Three, and this is all well known, let us delink petro prices from government control. Four let there be a fair playing field for both private and public sector firms.

Whatever the government does, inflationary tendencies are here for a while, and they will further spread through the economy in the next few months – no matter whether the data capture it or not. And despite the fact that some past growth estimates have been revised upwards (9% for 2007-08), the moderation shows in the quarterly estimates with the fourth quarter coming in at 8.8%, lower than the previous quarters. We estimate this years’ growth to be about 8.2%, but are among the most optimistic.

All indications from other sources now confirm a moderating growth – from PMI survey that shows lowest expansion in manufacturing in 10 months in May to real estate stories of decline in transactions and freebies to attract buyers etc. The signs are now quite clear that things will not be so rosy this year. Silver linings do exist – monsoon will favour agriculture, telecom and railways are still doing well, exports rose with the fall in the rupee in May. But the dark clouds of high crude prices and global slowdown cannot be wished away. So brace yourself for a tough year ahead, but at least we can now be proud of a government that does not consist only of wimps.