The Government’s decision to cut subsidies on diesel and domestic cooking gas (LPG) cylinders has created ‘substantial’ fiscal space for the Reserve Bank of India to act to stimulate economic growth, Planning Commission’s Deputy Chairman Montek Singh Ahluwalia has said.
The RBI is to review monetary policy on September 17. Ahluwalia said, “There is no doubt that adjustment (read hike) in diesel prices creates a fiscal space. This signal is good and the RBI will take this signal.” The rating agencies should also take this signal, he added. Key rating agencies such as Standard and Poor’s and Fitch had warned of a ratings downgrade unless there was fiscal correction. The Government, on Thursday, raised diesel prices by Rs 5 a litre and capped the subsidised LPG cylinder supply to 6 per annum per family. Such a move aims to reduce under recovery by Rs 15,000 crore on diesel and by Rs 5,300 crore on LPG during the year. Over 50 per cent of the under recovery is compensated by the Government by way of subsidies.
Higher the compensation, higher will be the fiscal deficit. Though the Government has targeted to keep fiscal deficit at 5.1 per cent during current the fiscal, most economists apprehend that it will be higher. Even the RBI has, in the past, put the onus on the Government to first take steps toward fiscal consolidation and bringing down the deficit before agreeing to loosen monetary policy any further.
The unsustainable level of the fiscal deficit has also pushed credit ratings firms to warn India that its sovereign debt rating could be downgraded to junk status if it didn’t take corrective action.
Ahluwalia said diesel prices should be completely deregulated, and local prices should be aligned with global prices. “Continuing with high subsidies is unsustainable,” he said.
He said raising the price is one of the tough decisions. The Government needs to take a lot of tough decisions to be able to grow at the targeted rate of an average 8.2 per cent a year during the 12th Plan.