India announces huge diesel price hike to curb deficit

Featured - September 15th, 2012
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Indian Prime Minister Manmohan Singh’s government has announced a hike in diesel prices: an attempt to curb the country’s budget deficit, the Financial Times reports.

Diesel prices will see a sharp rise of 14% to 47 rupees per liter from Friday while sales of subsidized cooking gas cylinders will be limited to six per consumer per year. The “politically risky” move is aimed at cutting India’s ballooning budget deficit, fueled by the government’s annual energy subsidies, which are worth $34 billion. Economic reformers have urged Congress leaders to curb the budget deficit, which accounts to 6% of the central government’s gross domestic product. According to economists, the move will also mean India could avoid a credit rating downgrade.

While business leaders deemed the government’s decision as “born out of necessity”, congress allies and opposition parties condemned the hike, claiming that it could trigger a backlash from a public  already suffering from high inflation. Brinda Karat, a member of the politburo of the Communist Party of India, told the FT: “This is a very cruel blow at a time when food inflation rates were already going up”.

Diesel is – considered the “poor man’s fuel” – is mostly used by trucks, buses, farm vehicles and household owners who wish to generate back-up electricity. The demand for diesel rose, particularly among the middle class, amid the widening gap between petrol and diesel prices.