Welcoming the fuel price hike decision by the government, PMEAC and economists today said the decision provides room for Reserve Bank to ease monetary policy to give thrust on growth.
The hike in diesel price will bring down burden on fiscal deficit even as it will put pressure on inflation. Inflation is expected to go up at least 0.4 per cent as diesel price hike will have cascading effect, they said.
Commenting on the government decision, Prime Minister's Economic Advisory Council Chairman (PMEAC) C Rangarajan said "We have to keep balance in price of diesel and petrol.
Recently, we have on several occasions but we have not acted on diesel.
"I think the opportunity of action for RBI is provided by this action of the government...The government has showed that it can take a very hard decision," Rangarajan added.
Biting the bullet, the government tonight raised the diesel price by a steep Rs 5 per litre and capped the number of subsidised cooking gas cylinder to six per household a year, decisions that will rake in an additional Rs 20,300 crore to the oil companies.
Echoing similar views, Department of Economic Affairs Secretary (DEA) Arvind Mayaram said the hike in diesel prices was 'difficult but necessary decision'.
Yes Bank's Chief Economist Shubhada Rao said, "Rise in diesel price will increase inflation by 35-40 basis points." Crisil Chief Economist D K Joshi also welcomed the government's decision the government today decision to hike diesel prices by Rs 5 per litre.
"Diesel has larger weight than petrol, it (hike in petrol price) will have inflationary effect but it is a good
decision. It will put pressure on inflation in short but in long run will have good impact on economy," Joshi said.
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