If we continue with subsidy on diesel, then either our oil companies will go bankrupt or our fiscal deficit will force us to cut plan expenditure on health and education.
A rollback of diesel price hike will have serious implications on the government's credibility, Planning Commission deputy chairman Montek Singh Ahluwalia said here on Tuesday.
"In my view, the government has taken this decision (of diesel price hike) after a lot of consideration. There should not be a diesel price hike rollback at all. If the government rolls it back, then its credibility will become zero," Ahluwalia told reporters on sidelines of SKOCH Summit.
Last week, the government announced its decision to hike diesel prices by over Rs 5 a litre, evoking sharp reaction and widespread demand for a rollback. According to Ahluwalia: "From an economic point of view, our diesel prices are lower than our neighbouring nations. If we continue with this (subsidy on diesel), then either our oil companies would be bankrupt or our fiscal deficit will increase so much that we would have to cut plan expenditure on health and education."
Aligning domestic fuel rates with global prices, he said, was also necessary to achieve rapid economic growth and ensure efficient use of energy sources. "It's necessary to cut diesel subsidy as it was not going to the needy but to those 'who driving cars'," added Ahluwalia. Given that India's fiscal deficit is the largest among the emerging market economies, Ahluwali thought it to be disastrous to follow that route. "It is unfortunate that in the political space, the issue is not being addressed," he added.
Denying any "policy logjam" in the government, Ahluwalia said, "in the last week, it has taken a number of steps. It is the people (protesters) on the street who want the logjam because they don't want these policy decision to be taken. As far as we are concerned, we are trying to break the logjam. Others are creating it."
Stating that India needed a series of reforms, he said, "Maintaining fiscal credibility was extremely important and we should back the finance minister on the need for fiscal discipline." Stressing on the need to cut subsidies, particularly petroleum products, he said, "In the 12th Plan (2012-17), we have drawn attention to the need of massive expenditure in health and education. For, it's the poor that is not getting the education and health services."
On the scope of improvement in the perception of rating agencies after host of big bang reforms announced last week, he said, "If any sensible rating agency, says, what is the Indian situation look like now compared to a month ago, they will say that the fear that the Government of India was incapable of acting was wrong, the lot of notion of policy logjam is wrong. Therefore, it would improve the assessment."
"If the rating agencies have decided that irrespective of what the government does, they are going to do a downgrade, then they are welcome," he added.
About the swelling fiscal deficit, he said, "I don't expect fiscal deficit to be 5.1% of GDP this fiscal because this was calibrated around 7.5% economic growth. Now we know that growth rate is going to be lower....may be around 6.5, so for that reason alone the fiscal deficit would widen."
Commenting on the Indian financial system, he said, it is not upto the mark. "Savings need to be channelised efficiently as it could further dip in current fiscal." About the functioning of government, he suggested decision making required improvement and should be in line with changing times. "Present file work is dysfunctional," he said.
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