Widespread opposition notwithstanding, Prime Minister's Economic Advisory Council Chairman C Rangarajan has strongly favoured an immediate increase in prices of diesel and cooking gas to contain government expenditure.
"It (increase in prices of diesel and LPG) should be done, as early as possible...We need to take action.... howsoever unpleasant it may be," he said in an interview to Karan Thapar's 'Devil's Advocate' programme on CNN-IBN.
Hiking the prices of diesel and cooking gas, Rangarajan said, was necessary to cap subsidies and contain fiscal deficit at 5.1% of the GDP during 2012-13. The fiscal deficit was 5.76% in 2011-12.
"There is a need to raise the prices because the fiscal deficit can be contained only if we act on cutting subsidies and the most important element in subsidies is the petroleum subsidy. Therefore, there is a need for action with respect to the prices of diesel and LPG," he said.
While petrol prices were freed in 2010, government continues to fix the retail price of diesel, LPG and kerosene. The oil subsidy is estimated to cost the exchequer over Rs 60,000 crore in the current fiscal.
Although the government has taken an in-principle decision to deregulate price of diesel, it could not implement the same because of opposition from political parties, especially BJP.
Rangarajan also favoured giving a push to reforms in multi-brand retail, pension and insurance and other sectors to promote growth.
"We need to push it (reforms) further. If we had grown at 9% during the earlier regime, we should be able to grow even now. But certainly, reform is a continuing process and we need to take action in various fields, such as banking, insurance, pension and get the consent of the people to these reforms," he said.
Rangarajan further said the government should take action to open foreign investment in multi-brand retail and work towards building consensus for its early implementation.
The government has not been able to open the retail sector to FDI because of opposition from various quarters including UPA allies. Political opposition has also held up key reforms in sectors like insurance, banking and pension.
As regards economic growth, he said 6.5% in 2011-12 "is a steep climb down" from the 9% growth that we have seen in the last three years after 2005-06. This is also a climb down from 6.9% growth rate which was estimated earlier".
For he current fiscal, he expects the growth rate to be in the range of 6.5-7%, lower than the government's estimate of 7.6%.
"At the moment 7.6% looks very ambitious.... At this particular point, it does look difficult to achieve... But certainly 7% I will not rule out," Rangarajan said.
On price rise, Rangarajan said high levels of inflation are not conducive for growth. He wanted the RBI to take steps to contain inflation saying the primary objective of the central bank should be to check price rise.
The WPI inflation was 7.23% in April, while the retail inflation was 10.36%.
The RBI is expected to take steps to deal with the problem of declining growth and rising inflation in its mid-quarterly monetary policy review on June 18.
Replying to questions on declining value of rupee, Rangarajan said government will have to take steps to encourage foreign investment.
"The pressure on the rupee is because of the inadequate capital flows to cover the current account deficit. We must encourage capital flows, and if the sentiment for that has to be created, we must do that. And we should examine critically factors that might come in the way of the perception of the investors and remove them," he added.
The rupee has dipped to a historic low of 56.52 against US dollar on Thursday mainly because of withdrawal of funds by foreign institutional investors.
On whether the current economic situation can be compared with the crisis in 1991, Rangarajan said, at present the country has adequate foreign exchange reserves and the economy had recorded impressive growth in the past years.
India's foreign exchange reserve stands at over $ 290 billion at present.