NEW DELHI, September 13 (Reuters): The government raised the price of heavily subsidised diesel on Thursday to rein in its fiscal deficit and fight the threat of becoming the first of the big emerging economies to be downgraded to junk.
The fuel price increase is politically risky and will almost certainly trigger street protests and a backlash from Congress Party allies worried about losing votes in state elections.
Protests earlier this year over petrol price and railway fare hikes prompted Prime Minister Manmohan Singh to back down and partially roll them back.
Diesel is one of the main contributors to a large subsidy bill that is seen pushing the country`s fiscal deficit above a target of 5.1 percent of gross domestic product. The fuel is mainly used by the poor and farmers, key constituencies of the Congress Party.
The long-awaited decision follows intense pressure on Prime Minister Singh to plug one of the biggest drains on the treasury. His government is also grappling with a sluggish economy and a slump in investment.
“It is a major positive for the markets,” said G. Chokkalingam, Executive Director & Chief Investment Officer, Centrum Wealth Management. “There will be more confidence now on other reform measures too.”
A cabinet committee agreed to raise diesel prices by 12 percent, or 5 rupees per litre, and restricted sales of subsidised LPG cylinders to six per consumer annually, the government said in a statement. It left petrol and kerosene prices unchanged.
The measures are effective from Friday.