Why a hike in diesel prices was necessary

New Delhi: After a hike in diesel prices, sources say a hike in petrol and kerosene prices is also on the cards. The government is reportedly under tremendous pressure from oil firms, who are losing a over Rs 550 crore per day.

The hike in diesel prices was long overdue. Today fuel subsidies account for 32 per cent of the country's fiscal deficit with diesel being the main contributor. Last year the government spent over Rs 80,000 crore in subsidising diesel, kerosene, LPG and petrol. This year the government has already finished the Rs 43,000 crore it has allocated for subsidising fuel. This money, economists feel, could have gone into infrastructure and other development projects. This move will contribute to reducing government's subsidy burden.

PMEAC Chairman Rangarajan told Network 18 that a hike will contribute in containing fiscal consolidation and will avert a credit rating downgrade.

The decision also sends a message to global investors that India is serious about reforms again. The oil marketing companies which have lost over Rs 1 lakh crore will bring down their losses by about Rs 20,000 crore in diesel. Petrol needed a hike of Rs 6 per litre but the government offset that by reducing excise duty by Rs 5.50 per litre from the existing rate of Rs 14.78 per litre. The under-recovery on sale of kerosene during 2012-13 will continue to be about Rs 32,000 crore. The industry has welcomed this move.

CII says it fully understands the economic compulsions for such a decision. "Rationalisation of fuel subsidies is a necessity from the point of fiscal consolidation," CII says.

Hike in diesel prices will also give the Reserve Bank of India room to cut interst rates. The RBI is set to announce its credit policy on September 17.

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