While petrol prices are market-linked, the government decides the rates of LPG, kerosene and diesel, which usually results in a large budgetary expenditure on subsidies.
Oil marketing companies increased petrol prices by Rs 1.80 per litre on Thursday. Finance Minister Pranab Mukherjee has acknowledged that the hike in petrol prices will have some impact on inflation.
Petroleum Minister S Jaipal Reddy has sought a meeting of a high-powered ministerial panel to decide on revising the rates of diesel, domestic LPG and kerosene as oil companies are suffering losses on the sale of these fuels. Prices of the cooking fuel and diesel were last revised in June.
At a time when inflation is hovering near double digits, it is feared that any hike in prices of diesel will further aggravate the situation. In September, headline inflation was measured at 9.72 percent. "However, (it is) important to explain to our people that if we subsidise diesel artificially, by running up a large fiscal deficit, that would also exert an upward pressure on prices," the Chief Economic Advisor said.
Basu, who also heads a Prime Minister-appointed panel on inflation, said deregulating diesel prices will make India a more responsible country environmentally, because then "we will not encourage over-consumption of diesel vis-a-vis other more environment-friendly energy substitutes".
On inflation, he said bringing it down is a priority. "I would like Indian inflation to be kept firmly below 5 per cent. In fact, I would like a target of 4 per cent. That gives you flexibility for relative price adjustment and also purchasing power parity adjustment, which is natural during high growth," he said.
The CEA, however, admitted that India won`t be able to bring down inflation to the target of 5 per cent by the end of the fiscal. "But if we can reach 5 per cent or less sometime toward the end of the next calendar (2012), that would be good," he added.
The Reserve Bank has hiked interest rates 13 times since March, 2010, in its bid to tame inflation, a cause of big concern for the government. The central bank expects inflation to moderate to 7 per cent at March-end and Basu agrees with the forecast.