India's government raised diesel prices by 14%, risking public and political backlash in an effort to bring its budget deficit under control and win back the trust of foreign investors.
A worker switches on a fuel pump before filling a car with diesel at a fuel station in New Delhi Sept. 13, 2012.
The decision by cabinet members at a meeting late Thursday is aimed at bringing down subsidies on prices of diesel and cooking fuel that cost the state $15 billion a year, or 1% of gross domestic product.
Those subsidies were a major contributor to a budget deficit last year of 5.8% of GDP. The deficit pushed international ratings firms to warn India that its sovereign-debt rating could be downgraded to junk status if it didn't take corrective action.
The price increase, effective Friday, could trigger nationwide protests. The ruling Congress party has faced opposition from within its own coalition ranks to any rise in diesel prices, with opponents arguing such a move would hurt India's poorest citizens.
Financial Year
The move is likely to be welcomed by Indian businesses and foreign investors who have soured on India in recent months. Foreign investment in physical assets has slowed amid concerns over the country's dimming economic growth prospects and mounting budget and trade deficits.
Budget Deficit
Growth slowed below 6% in the most recent quarter, its slackest pace in almost a decade and much lower than levels of over 8% in recent years, in part because of global stagnation but also the government's financial problems.
"It is a right move toward managing the fiscal deficit," said Deven Choksey, managing director of Mumbai-based brokerage K.R. Choksey Shares and Securities. "India has averted the situation of a downgrade by international rating agencies."
New Delhi began two years ago to allow gasoline prices to rise toward market levels. But it kept large subsidies on diesel, a fuel used by India's poorer citizens and farmers. The last price increase for diesel was in June, 2011.
Source: http://online.wsj.com
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