Rocket fuel

14 September 2012 By Jeff Glekin

The government has announced a bold 14 percent hike in the price of diesel. Now it needs to stay the course, embrace the decision rather than apologise for it, and move fast to get even more done. A shift in public spending from consumption to investment is the ultimate goal.

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The Indian government raised the price of heavily subsidised diesel late on Sept. 13. A cabinet committee increased diesel prices by five rupees per litre. That translates as a 14 percent rise, including taxes. The committee also decided to limit the number of subsidised cooking gas cylinders per household to six per year, a move seen as hitting the poor hard. Any LPG cylinders bought over this ceiling will be at market rates, which could almost double the price.
The fuel price increase caused an instant political backlash. Trinamool Congress, a partner in the ruling coalition, announced a protest march at the weekend and the Bharatiya Janata Party (BJP) called the move “financial terror”.
Diesel is one of the main contributors to a subsidy bill that economists warn could push the country’s fiscal deficit above a target of 5.1 percent of gross domestic product.
The Sensex rose more than 2 percent to new seven-month highs on Sept. 14 following the announcement and after the Federal Reserve announced a new asset purchase programme.
The cabinet will also consider a proposal on Sept. 14 to allow foreign airlines to buy stakes in local carriers. Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.

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