While economists fear that the Centre, already reeling under high inflation and increasing food prices, might find it tough to contain the prices of essential commodities after the fuel price hike, Finance Ministry's Chief Economic Adviser Kaushik Basu on Friday said its impact would be only 0.9 per cent.
“I expect an increase of 0.9 percentage points in the monthly WPI inflation. But since these changes will cause the fiscal and revenue deficits to decline, they will exert a downward pressure on prices. Hence, though the immediate impact of this policy will be to increase inflation, in six to nine months we will have lower prices than what would have happened in the absence of this much-needed reform,” he said in a statement.
A major reform
Defending the fuel price hike, Mr. Basu said: “To describe the government's decision to deregulate petroleum and diesel as an act of raising prices is to get it completely wrong. It is one of the most major reforms of recent times and should have beneficial effects on the entire economy. What is being done is to put both diesel and petrol prices on a float. Prices will rise and fall in step with the international prices. For diesel, there will still be a per-litre subsidy from the government, to keep the domestic retail price below market level. But what is important is that it will no longer be a fixed price.
“More importantly, from now on, if there is a global shortage and the international price of crude rises, this signal will be transmitted to the Indian consumer. It will rationalise the way we spend money, the kinds and amount of energy we use, and the cars we manufacture. It is an important step in making India a more efficient, global player.”
Similarly, Petroleum Minister Murli Deora said the move would not only improve the finances oil marketing companies but also enable the government to allocate greater resources for social sector schemes.
“Market determined pricing is expected to attract higher investments in the fuel retail sector, and by spurring market competition, encourage OMCs to reduce costs, improve efficiency and service standards. Market determined pricing will also incentivise fuel conservation and encourage the consumer to adopt fuel efficiency practices.”
Pointing out that the existing prices of PDS kerosene and domestic LPG were the lowest among the neighbouring countries, Mr. Deora said the consumer price of kerosene was Rs.35.97 a litre in Pakistan, Rs.29.43 in Bangladesh, Rs.21.02 in Sri Lanka and Rs.39.24 in Nepal. The consumer price per cylinder of LPG was Rs.577.18, Rs.537.37, Rs.822.65, and Rs.782.84 respectively.