Montek favours fuel price hike

The government has provided a strong indication that it intends to pass on the increasing crude oil prices to the retail consumers.

Planning Commission Deputy Chairman Montek Singh Ahluwalia today said he favoured a hike in the fuel prices to offset the increase in international crude prices.

"The only viable strategy is to pass on the subsidy (oil) burden to the consumers, while providing targeted subsidy to the needy. And if we do not do it, investments in social sectors will be affected", he told reporters here today after a meeting of the full Planning Commission to adopt the draft 11th Five Year Plan (2007-12).

Ahluwalia's comments came after Prime Minister Manmohan Singh said the government needs to address the problem of mounting subsidies in food, fertilizers and petroleum. "Over Rs 100,000 crore will be spent this year alone on these three items", Singh said in his opening remarks at the Plan panel meeting.

However, as Ahluwalia pointed out, rasing retail prices of fuels is a sensitive issue, fraught with political implications.

"If the prices are passed on fully to the consumers, it would reduce demand for oil, raise the inflation rate and lower the growth rate of the economy", he said, adding that the present policy of insulating consumers from the global price rise in crude was not sustainable as public sector oil companies were bearing the brunt.

Ahluwalia also pointed out that at the time of preparing the 11th Plan document, international oil prices were ruling at $80 per barrel and had since surged to $ 98. "I am not an expert to say in which direction they will move," he added.

A Planning Commission background note on the macro-dimensions of the 11th Plan states that a 25 per cent increase in oil price from $80 per barrel can be expected to increase India's import bill by 5 per cent, increasing the current account deficit-gross domestic product ratio by around one percentage point.

Pointing out that given the current foreign exchange reserves of the country, Ahluwalia said it would not be a problem to pay for the increasing oil bill.

However, he made it clear that if the prices are not increased, the fiscal will have to bear the brunt.