It would be better to make fuel prices rise than to let Budget deficits grow, said TCA Anant, who recently took over as secretary of the ministry of statistics and programme implementation
New Chief Statistician TCA Anant today said hiking fuel prices was a better option than keeping them artificially low and widening the fiscal deficit, even as the Opposition organised a nationwide strike against the government's decision today, reports PTI.
"On the balance, it would be better to make fuel prices rise than to let Budget deficits grow," Anant, who recently took over as Secretary of the Ministry of Statistics and Programme Implementation, told PTI in an interview.
Anant also hinted that the government's move to hike fuel prices should have come sooner, but acknowledged that it was difficult to time these kinds of decisions because of "multiple pressures" in a democracy.
"It is very difficult to time these kinds of things, trying to time these things right is next to impossible, particularly in a democracy where you have multiple pressures at any given point of time. It is a right policy and it should have been taken earlier," he said.
Explaining his reasoning for supporting the hike, he said if an open-ended fuel subsidy is maintained, huge budget deficits would occur when global petroleum prices rise. "This, too, contributes to generalised inflation," Anant said.
When asked whether diesel prices should also be deregulated like petrol, he said it is not a question of whether you should give a diesel subsidy or not, the relevant point is whether it should be given in a manner that it has an unbounded effect on the budget deficit.
"Then what you are doing is you are converting uncertainty in a single commodity's price into a generalised uncertainty over your entire price level," he explained.
Anant said an economy cannot have a strict regulated regime for fuel prices, as it will widen the Budget deficit.
"You can continue a policy of management, where you temper the global effects on the domestic economy, but you cannot have a strict regulated regime that we will not allow diesel prices to rise. What does it mean? It means that you have created an open-ended draw on your Budget," he said.
The Chief Statistician said since a rise in petroleum prices makes them relatively expensive vis-a-vis other fuels, some kind of substitution of these petroleum products will also happen, leading to a dampening impact on inflation.
"Rise in fuel prices will lead to some effect on general price level, but because it changes relative prices, there will be some substitution. So, the effect would be dampening. If I don't do it, I will be creating generalised inflation," he said.
The government had last month deregulated petrol prices, leading to a hike of Rs 3.5 a litre, while diesel rates were increased by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by Rs 3 a litre.
The Opposition NDA and Left Front today protested against the government's move to raise fuel prices and rising inflation.
Though food inflation has moderated substantially by a whopping 3.98 percentage points to 12.92 per cent for the week ended June 19, food prices are quite high.
Earlier, RBI had said, "There has been some moderation in food price inflation, but the price index of food articles continues to increase."
RBI further said, "Although entirely justified in terms of long-term fiscal and energy conservation objectives, the recent increase in fuel prices will have an immediate impact of around one percentage point on WPI inflation, with second round effects being felt in the months ahead."
Overall inflation stood at over 10 per cent in May.
Petroleum Secretary S Sundareshan had said the decision to hike fuel prices will help bring down the revenue oil PSUs lose on selling fuel by about Rs 21,000 crore to Rs 53,000 crore.
"This (Rs 53,000 crore) under-recovery will be borne by the government and upstream oil companies like ONGC," he had said.
A lower fuel subsidy bill may help the government reduce the fiscal deficit substantially. It was estimated to come down to 5.5 per cent of GDP during 2010-11 from over 6.6 per cent last fiscal.
Food inflation declined by almost 4 percentage points to 12.92% for the week ended 19th June, but several analysts attributed the decline to the base effect rather than any real decline in prices
The government today said food inflation has started easing and will fall to an acceptable level of 5-6 per cent in due course, even as the BJP-led National Democratic Alliance and Left Parties went ahead with a nationwide strike to protest against rising prices, reports PTI.
"Food inflation is going down. It will take some time before it really comes into a range which is acceptable to the government and which is good for the people," Finance secretary Ashok Chawla told reporters on the sidelines of a conference on state highways here.When asked what would be an acceptable range of food inflation, he said it would be 5-6 per cent.
The Finance Secretary's statement came on a day when the Opposition NDA and Left Front staged protests against rising inflation and the hike in fuel prices announced by the government last month.
Food inflation declined by almost 4 percentage points to 12.92 per cent for the week ended June 19. Several analysts attributed the decline to the base effect, rather than any real decline in prices.
Wholesale price-based inflation, which includes variation in food prices, crossed double digits (10.16 per cent provisionally) in May, but as per final figures, the rate of price rise has been 11 per cent or more since February.
Analysts feel that inflation will increase in the coming days as the impact of the fuel price hike comes into effect.
The government had last month deregulated petrol prices, leading to a Rs 3.5 a litre hike, while diesel rates were raised by Rs 2 a litre, LPG by Rs 35 a cylinder and kerosene by Rs 3 a litre.
Meanwhile, the Reserve Bank yesterday said that managing inflation will remain its main priority.
"For RBI, inflation is everything. For (finance) ministry, it is growth. But in the long run, both will converge. Inflation is the biggest enemy," RBI Deputy Governor K C Chakrabarty had said.
In an unscheduled move, the Reserve Bank on Friday hiked the lending and borrowing rates (repo and reverse repo) by 25 basis points each to 5.5 and 4 per cent, respectively.
According to the ratings agency, the RBI’s move to increase short-term borrowing and lending rates to control inflation will put pressure on banks’ deposit and lending rates
Credit ratings agency Moody's today said the Reserve Bank of India's (RBI) recent move to hike short-term borrowing and lending rates to tame inflation will put pressure on overall deposit and interest rates, PTI reports.
While agricultural production will be the main determinant of consumer price inflation during the next few quarters, the central bank is also expected to keep a tight lid on the monetary policy regardless of how inflation moves, the ratings agency added.
"(Last) Friday's actions by the RBI will put pressure on bank deposits and lending rates, which have been stable and low since November," Moody's said, adding that higher interest rates will lead to increased savings and a decline in growth of loans after a period of rise.
In order to tame inflation, the RBI had on 2nd July raised the repo and reverse repo rates (the rates at which the RBI lends and borrows short-term funds from commercial banks) by 25 basis points to 5.50% and 4%, respectively.
Although food inflation dipped to 12.92% for the week ended 19th June, overall inflation for May stood at 10.16%.
Moody's said there have been signs that inflation has spread away from food and fuel prices towards other goods and services.
"By hiking its policy rates, the RBI is hoping to cool demand and send a signal that it is taking action to ground inflation expectations," it added.
It is widely expected that the central bank may effect another 25 basis point hike in policy rates at its quarterly monetary review meeting scheduled for 27th July.
The ratings agency said agricultural production would be a primary factor in determining consumer price inflation in the short-term.
"The main determinant of consumer price inflation over coming quarters will be agricultural production. If the harvest of summer crops late in the year disappoints as it did in 2009, then inflation (is) likely remain uncomfortably high into next year," Moody's said.
Consumer price inflation has been in double-digits since July, 2009.
The ratings agency said that inflationary pressure is expected to ease next year in case a good monsoon leads to a bountiful harvest and prices fall, Moody's added.
"Regardless of how prospects for food and fuel prices evolve over coming months, the RBI will continue to tighten monetary policy, which is currently closer to a slow growth setting rather than one of strong growth and high inflation," it said.