Diesel price hike to have benign impact on inflation: Montek

Dismissing the contention that diesel price hike will push inflation, Planning Commission Deputy Chairman Montek Singh Ahluwalia today said it will have a benign impact on prices as consumers will be left with less money to buy other goods.

"When you have a suppressed price and you raise that prices, then the people who are paying that higher price will have less money left to buy other things and that will soften the pressure in the market on other prices.

"What is going to happen is that diesel prices are certainly going to rise but the inflation on other prices is going to be reduced...correcting those energy prices will lead to a boost of inflation is basically, in my view is (rpt) is wrong", he told reporters here.

Satisfied with the government's decision to partially deregulate diesel by permitting oil marketing companies (OMCs) to raise prices by 45-50 paise per month, Ahluwalia said it would end under-recoveries of OMCs towards sale of transport fuel in the next 18 months.

"Basically it (under recoveries in case of diesel) is Rs 9 per litre, and if we adjust that say 50 paise per month, it will take 18 months for diesel to get back to pretty much what we call a market aligned prices...Deficit on diesel will be eliminated in 18 months", Ahluwalia said.

The Plan Panel Deputy Chief further said that Reserve Bank (RBI) will take into account factors like government's determined action to curb subsidy and the decline in inflation while announcing monetary action in its next policy later in the month.

There is pressure on RBI to cut interest rates in its third quarterly monetary policy to be unveiled on January 29 to arrest contracting industrial production and boost economic growth.

Ahluwalia further said selling diesel prices below production cost has a significant bearing on the OMCs.

"Deficit in diesel prices kills OMCs. It is a wrong notion that diesel hike pushes inflation," he said.

The wholesale price based inflation declined to 7.18 per cent in December versus 7.24 per cent in November. However, retail inflation rose to 10.56 per cent in December on account of higher food prices.

The state owned OMCs sell diesel at a loss of about Rs 9.60 per litre owing to subsidy. Diesel accounts for 59 per cent of the estimated Rs 160,000 crore fuel subsidy bill in 2012-13.

Finance Minister P Chidambaram yesterday said that the government will not factor the impact of diesel price hike by oil companies while computing the oil subsidy bill for the current fiscal.

The government in December obtained Parliament approval for raising the oil subsidy bill by Rs 28,500 crore over and above the amount earmarked in the Budget for 2012-13. With the additional allocation, the total oil subsidy bill in the current fiscal will soar to Rs 72,260 crore.