The Centre, desperately seeking revenue, finally moved to hike the politically explosive diesel prices on Thursday by a touch. While the amount of hike is rather small, giving oil firms the freedom to do it as and when they need is perhaps the biggest reforms step taken so far.
It may not lead to immediate rise in inflation but if continued, will do by the latter half, said experts.
In the context, will the Reserve Bank of India governor proffer the much-sought rate cut at his review of monetary policy on January 29? “It is always a trade-off between fiscal health and headline inflation. However, if the headline WPI goes up due to fuel price hikes, it should not be seen (by the RBI) as core inflationary pressure,” said Siddhartha Sanyal, chief India economist, Barclays.
“The optical impact on inflation would be relatively less as inflation for most other components will likely soften in coming months,” due to base effect, he said.
A Prasanna, economist, ICICI Securities Primary Dealership, said the move is positive for fiscal deficit. “The government will have to set aside smaller portion of budget for diesel subsidy next financial year,” he said. The current financial year began with Subbarao unexpectedly slashing repo rate by 50 basis points on April 17 to boost growth.
After the announcement of first quarter policy review on July 31, Subbarao was quoted saying that the decision to cut policy rates was not a ‘hasty’ one. “It was necessary to frontload the rate reduction. That was based upon the expectation that some action will follow from the government side in the event that did not happen,” Subbarao had said then.
“The government is doing its best to send a clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government’s commitment to the path of fiscal consolidation,” Chidambaram had said.
The government’s proposal to increase cap on subsidised LPG cylinders per household per annum to nine from the current limit of six, is a retrograde step, Kotak strategists Sanjeev Prasad and team said. “We expect the annual savings on LPG subsidies to reduce to 9% assuming the proposed cap of nine cylinders per household per annum versus 28% assuming current cap of six,” he said.
Both the government and the RBI share concerns on growth. Even (the) RBI has concerns about growth and inflation; only, our balance is shifting. If you are asking about the nuances in the finance minister’s statement, I think you should ask him.
— RBI governor Duvvuri Subbarao on Oct 30
Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth then we will walk alone... Sometimes it is best to speak, sometimes to remain silent; this is the time for silence.
— Finance minister, P Chidambaram on Oct 30