In a stout defence of the government’s decision to hike diesel prices and rationalise the supply of subsidised LPG cylinders, Planning Commission Deputy Chairman Montek Singh Ahluwalia on Friday argued that the measure was aimed at changing the perception of global rating agencies and creating the fiscal space to thwart a downgrade of India’s sovereign rating.

At a media interaction here a day after the diesel price hike and on the eve of the full Planning Commission meeting to endorse a scaled down GDP (gross domestic product) growth target of 8.2 per cent for the 12th Plan (2012-17), Mr. Ahluwalia said: “The perception of the rating agencies that India cannot raise diesel prices will change. Rating agencies should take a good look at it. The fiscal space which has been created is quite substantial…We have done the right thing. The rest is up to the RBI [to do].”

The “right thing” referred to by Mr. Ahluwalia was to the increase in diesel prices by over Rs. 5 per litre and restrictions on supply of LPG cylinders to six in a year per household while the RBI action pertained to whether or not the apex bank actually eases its key policy rates on September 17 in keeping with the wishes of India Inc.

Also, Mr. Ahluwalia sought to drive home the point without referring to the global rating agencies such as Standard and Poor’s (S&P) and Fitch which had threatened to scale down the country’s sovereign rating to speculative grade or ‘junk’ status on account of the widening fiscal deficit and seeming policy paralysis on the part of the government.

“There is no doubt in my mind that the adjustment in diesel price represents creation of fiscal space... One of the problems people earlier felt was that the fiscal situation of the country lacked credibility because there was a sort of impression that diesel prices cannot be raised. The signal that has been given is very good,” he said.

As for the inflationary impact owing to the hike in diesel prices, Mr. Ahluwalia said: “It is not necessary that the diesel price hike would result in increase in prices of other commodities. It could be possible that prices of one or two items may go up… But it will not be appropriate to say that keep diesel prices low, continue subsidy and destroy petroleum companies... this arrangement would keep a tab on inflation...[but] this is not correct.”

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