Hike diesel price or face situation like grid collapse: Montek

"The real question is that if we don't take these hard decisions (diesel price hike), there will be other consequences. You saw that with the grid collapse ... If distribution companies are unable to pay for power, you are going to have some problems," he told reporters here.

On the diesel price hike, Ahluwalia said, "when they will raise prices, it will initially have negative impact ... But not raising prices will only mean that oil sector continues to bleed."

State-owned oil firms sell the fuel at a loss of about Rs 13.65 a litre while they lose Rs 231 on sale of every 14.2-kg LPG cylinder for domestic consumption. Besides, they are losing Rs 29.97 per litre on kerosene.

Without a price hike, a staggering Rs 1,60,000 crore of losses on these fuel sales would have to be met by the government this fiscal.

Ahluwalia further said, "It is mistake to think that raising diesel prices will cause inflation ...As if leaving them low and having hidden subsidy will not cause inflation."

If the diesel prices are not aligned with international rates, he said, "either the budget will have to bail out (the oil companies) or we will end with the very sick energy sector. Neither of these is good for inflation."

According to Ahluwalia, "... Continuing subsidy is not a free lunch. If it was then I am in favour of continuing subsidy."