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Fuel price hike, duty cut to help contain inflation: Montek

Defending the government's decision to raise prices of petroleum products, the Plan panel today said it would suck money from the system and ease inflationary pressure in the long run.

business Updated: Jun 29, 2011 16:07 IST

Defending the government's decision to raise prices of petroleum products, the Plan panel on Wednesday said it would suck money from the system and ease inflationary pressure in the long run.

"As we are raising the prices, that will pull money away from the system. That would have a softening impact (on inflation)," Deputy Chairman Planning Commission Montek Singh Ahluwalia told reporters.

He further said, "I don't agree with the view that if we had done nothing, inflation would have been lower. If we had done nothing, then the hidden inflation would have been eating away."

The decision to cut duty, he said, "was a conscious decision to lose some revenue to moderate the impact (of the fuel price hike on the common man)".

The government had last week hiked diesel, kerosene and cooking gas prices by Rs 3 per litre, Rs 2 per litre and Rs 50 per cylinder, respectively.

In addition, the government also reduced customs duty on petroleum products to 2.5% from 7.5%, which would result in an annual revenue loss of Rs 49,000 crore.

Excise duty on diesel was also reduced from Rs 4.6 per litre to Rs 2 per litre.

During the remaining eight months of the fiscal, the Centre and states will lose around Rs 24,000 crore and Rs 11,000 crore, respectively, due to the duty cut on petroleum products.

The Plan panel chief said the rise in prices of fuel items would suck liquidity from the system, leading to a moderation in inflation numbers.

Headline inflation, as measured in terms of the Wholesale Price Index, stood at 9.06% in May and experts said it will breach the double-digit mark by July on account of the fuel price rise.

Regarding the impact of the fuel price hike on the fiscal deficit, Ahluwalia said: "They (government) have quantified some revenue losses. What happens to the fiscal deficit depends on many other things. I am sure the finance ministry is looking at that. And I think they are shortly going to submit to Parliament some sort of medium assessment on the fiscal position."

He further said, "My personal view is that if we are looking ahead and if India faces a situation of rising energy prices, we should adjust ourselves to passing on the fuel prices, because if we have fail to do so, we will be weakening the economy."

Asked his views about when the inflation numbers are likely to moderate, he refused to make any guess.

"The Finance Ministry has said that if the monsoon is normal and agricultural production is good, then price pressure will decrease. But I do not want to give a forecast," the Plan panel chief said.