Low fuel prices won't stem inflation: Montek

INDIA ECONOMIC SUMMIT 2007

The burden of higher fuel prices should be shared by the consumer to ease the government's burden.

Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, cautioned against capping the retail prices of fuels to contain inflation. India will have to raise them if global crude remains high.

"It is the view of the Planning Commission that if oil prices remain high on a sustained basis it will have to be passed on," he observed on the sidelines of the India Economic Summit on Tuesday. "I don't believe keeping oil prices low is a good way of controlling inflation," he added.

Asia's third-largest economy imports 70 per cent of its oil needs. India is yet to hike prices of petrol and diesel this year despite global oil racing towards $100 per barrel in recent weeks. While India's crude basket has risen by 145 per cent since April 2004, retail prices of petrol have gone up by just 29 per cent and those of diesel by 40 per cent.

Public sector oil companies are bearing the brunt of the oil rise, with the state-run retailers losing $50 million a day as they have to sell widely consumed fuels like petrol and diesel at rates set by the government, well below market prices to protect poor consumers and help monetary policy.

Compounding the problem are elections scheduled next week in Gujarat, which have weighed on the minds of policymakers, thus making any any early move to raise fuel prices politically risky.

India's wholesale price inflation, the most widely watched measure, is at its lowest in five years, just above 3 per cent annually in November. Oil industry analysts say this is a measure to artificially keep inflation low.

The analysts argue inflation is probably much higher than the official data and closer to the less frequently published consumer price reading of about 5.5 per cent.

A panel of senior ministers tasked with reviewing the pricing of essential commodities, including fuels, will hold its first meeting on December 14.

India had last raised petrol and diesel prices by Rs four a litre and Rs two a litre respectively in June, 2006 when the Indian crude basket was trading around $67 a barrel. It has since rolled back the increase in two stages.

Reinforcing his stand, Ahluwalia said the Indian economy could withstand a rise in prices: "Our judgement is that the economy can manage that ... Of course, it is necessary to pass on the oil price while retaining subsidies for those who need it."

Ahluwalia, on an earlier occasion, had said if consumer, who could afford the price hike, did not bear the burden, the government would find it difficult to fund social sector programmes.

High oil prices is one of the adverse economic factors which could trim the expected growth of 9 per cent in the fiscal year.