Diesel price-hike will aid fisc, give RBI room: Rangarajan

The increase in diesel prices will aid in trimming the fiscal deficit and improve economy's credit rating, PMEAC chairman C Rangarajan, told CNBC-TV18 on Thursday. The government raised the price of heavily subsidised diesel in a politically risky move to rein-in fiscal deficit and fight the threat of being the first in the BRICS group of emerging economies to be downgraded to 'junk'.

Meanwhile, Pronab Sen, principal advisor, Planning Commission, explained that there is a difference between rise in prices and inflation. He added that the diesel price hike will impact inflation only by around 12%.
However, both experts concurred that the government’s decision has allowed the RBI adequate headroom to act on monetary policy. Below is an edited transcript of their reactions on CNBC-TV18. Q: This what the PMEAC had been recommending and a decision has been finally taken atleast as far as diesel is concerned. What does this mean in terms of fiscal consolidation? Rangarajan: I think it will significantly contribute to containing the fiscal deficit. Though the loss in revenue due to the reduction in excise duty needs to be estimated, on the whole, this as a bold step taken by the government towards achieving a balance in the fiscal situation. Q: But though the government has finally moved on diesel, it has left petrol untouched. Though the government is suffering an under-recovery of about Rs 6 a litre on petrol, the most that has been done is a bit of tinkering with the excise duty on the petrol? Rangarajan: I think the oil marketing companies will not lose much on petrol because some adjustment has been made to allow them the benefits of a reduction in excise duty. It is important that a balance is maintained between the price of petrol and diesel. Q: What will this mean in terms of possible RBI response? Is this enough in terms of providing the central bank adequate fiscal room that it looked forward to from New Delhi? Rangarajan: I think the opportunity for action by the Reserve Bank has been provided by this decision of the government. The RBI will take another look at the inflation data that maybe released in a day or two and then make its move. But the government has boldly shown that it can take very hard and difficult decisions and the RBI should welcome that. Q: Finally the government is biting the bullet by hiking diesel prices by Rs 5 a litre, However the opinion of the RBI and the finance ministry differ regarding the probable impact on inflation. What is your view? Pronab Sen: We really need to distinguish between rise in prices and inflation. Inflation is a process and something like a diesel price hike will impact inflation only by around 12%. Q: Do you think there is enough fiscal space already for the Reserve Bank to move on September 17 or will the central bank be well advised to wait for further rollbacks? Pronab Sen: I have a feeling the RBI  will wait to see if there is a rollback. But even if there isn't a rollback, it would be prudent for the RBI to wait and gauge the level of expectations. So, it does give the RBI a lot more space to relax on monetary policy, but I am not sure if it would reduce policy rates. The RBI may actually just ease up on the liquidity side.