The government raised the price of heavily subsidised diesel on Thursday, in a politically risky move to rein in the fiscal deficit and fight the threat of being the first in the BRICS group of emerging economies to be downgraded to junk.
A cabinet committee agreed to raise diesel prices by 12 percent, or 5 rupees per litre, and restricted sales of subsidised LPG cylinders to six per consumer annually, the government said in a statement. It left petrol and kerosene prices unchanged.
COMMENTARY
G. CHOKKALINGAM, CHIEF INVESTMENT OFFICER, CENTRUM WEALTH MANAGEMENT
"Market would be enthused by government's move on diesel prices. It is a major positive for the markets. There would be more confidence now on other reform measures too."
INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
"Obviously, this is a positive signal because it shows the government is ready to move. But this is only the first step, and lot more needs to be done to bridge the fiscal gap."
"It is not clear by how much the government would be able to reduce its subsidy on LPG by restricting supply to six per year per consumer."
"The rise in diesel price is likely to add about 25 basis point to headline inflation."
BACKGROUND
-- New Delhi subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has nevertheless put a severe strain on public finances.
-- The rising bill from the fuel subsidy and the resulting strain on public finances have put India's investment grade credit rating in peril.
-- India's rate of inflation probably picked up in August from July's near three-year low as poor summer rains drove up food prices, a Reuters poll showed.
-- The Reserve Bank of India is expected to keep its key interest rate steady when it reviews its monetary policy on Monday, according to a Reuters poll earlier this month. It has called on the government to free up supply constraints that have pushed up food prices, and launch fiscal reforms.
Copyright @Thomson Reuters 2012
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