Increasing fuel prices was necessary to narrow India’s fiscal deficit to the targeted 4.6 per cent of the gross domestic product (GDP) in the current financial year, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said on Thursday.
“I think the need to take corrective actions with respect to petroleum prices has become urgent. We need to contain fiscal deficit at 4.6 per cent of the GDP during the year. Therefore, some actions are called for to contain the subsidies at the budgeted level,” Rangarajan told reporters here on the sidelines of a conference organised by Skoch Consultancy Services.
During his Budget speech in February, Finance Minister Pranab Mukherjee had kept the fiscal deficit target at 4.6 per cent in 2011-12. The fiscal gap was projected to narrow further to 4.1 per cent in 2012-13 and 3.5 per cent in the following year.
However, economists including the government’s Chief Economic Advisor Kaushik Basu expressed doubts over reducing fiscal deficit to the targeted level, as oil prices have remained firm so far this financial year. Last month, the government allowed oil marketing companies to increase petrol price by Rs 5 a litre.
“The target is difficult to achieve but I believe that the government is committed to maintain the fiscal deficit at the budgeted level. Actions were taken by oil marketing companies with respect, I think soon it will be done (in diesel),” Rangarajan said. He, however, dismissed fears over India’s economy slowing down following monetary policy tightening by the Reserve Bank of India (RBI) to control inflation.
RBI had raised key policy rates by 50 basis points in May after increasing rates as many as seven times last financial year. The rate hikes were aimed to control inflation, which was at 8.66 per cent in April.
Worries over slow growth in the domestic economy mounted after India’s GDP grew 7.8 per cent in the quarter ending March 31 compared to 9.4 per cent in the corresponding period in the previous year.
“I don’t think by taking (monetary policy) actions on inflation we are affecting growth. What we really need to look at is growth over the medium term and I believe growth over the medium term require a low level of inflation,” he said.
“In the last quarter of the last financial year, the growth rate came down because of a slowdown in the manufacturing sector, particularly capital goods. I believe the capital goods sector will recover in the current year and, therefore, we can hope to see close to 8.5 per cent growth,” he added.
He said RBI’s policy actions in coming months would continue to depend on the level of inflation.
Rangarajan, however, warned of relatively low levels of yield in major cereal crops and pulses and shortage of infrastructure in the power sector pose threat to the country’s economic growth.
