New Delhi: Kaushik Basu, chief economic adviser in the finance ministry, on Wednesday made a case for increasing the administered retail price of petroleum products as a measure that would have a relatively less harmful effect on inflation compared to a slippage in the fiscal deficit.
Basu’s take on administered prices was supported by Planning Commission deputy chairman Montek Singh Ahluwalia, who said an expansion of the fiscal deficit to absorb an open-ended subsidy on fuel would eventually hurt the public.
The views of Basu and Ahluwalia are important in the context of an impending meeting of ministers in the United Progressive Alliance (UPA) to discuss the possibility of increasing the administered prices of diesel, kerosene and cooking gas. The date for this meeting of the empowered group of ministers (EGoM) has not yet been finalized.
February’s Union budget assumed the average international crude price in 2011-12 would be around $97 per barrel. The trend in the market since then has led to the Reserve Bank of India (RBI) announcing its forecasts would be made at an average price of $110 per barrel.
The retail prices of some fuels such as diesel are absorbed eventually by the government, which widens the fiscal deficit. A widening fiscal deficit runs counter to the UPA’s aim to rein in borrowing and free up space for private companies to raise money.
An increase in administered prices will push up inflation, but the long-term impact would be less harmful, Basu argued. The Union budget is premised on the same assumption and plans to reduce the fiscal deficit as a percentage of gross domestic product to 4.6% in 2011-12 from the estimate of 5.1% in the previous fiscal.
“Try to control as few prices as you can so that price signals don’t get switched off,” Basu said. A reduction in administered prices should be offset by transferring direct benefits to the poor so as to insulate them, he said. Basu was speaking at a function organized by the Institute of Applied Manpower Research of the Planning Commission.