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Diesel likely to see steep yet gradual hike

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To reduce and redirect govt. spending, price will possibly rise by Rs 10/l over the next 10 months

Government of India: With major reforms failing to bring in desired economic effects, coupled with political pressure from the opposition, the Indian government is considering reducing government spending, by increasing the regulated and state set price of diesel fuel.

The decision, as of now, is to increase diesel prices by Rs 10 a litre over the next ten months.

This is being done to redirect government spending in social programs.  Although government spending on subsidies has helped contain inflation, it has compromised spending on infrastructure and social activities.

Increase in diesel prices would have serious economic implications, especially on inflation, even in Bhutan, which practically imports everything from India, including fossil fuels.  Prices of food are bound to increase as transport cost go up because of higher fuel prices.

Even prices of industrial products will increase, as trucks are widely used to transport raw materials and finished products.  Economic literature construes that, with increase in food and fuel prices, more people are pushed below the poverty line, as cost of living increases.

Inflation in Bhutan was recorded at 11.1 percent in the third quarter(July, August, September) of 2012.

It was 13.5 percent in the previous quarter, the highest since 2003.

In Thimphu, diesel today costs Nu 46.74 a litre after the Indian government increased its prices by Rs 5 in September this year, the highest hike ever.

With the revision making little economic gain, the Indian government again introduced a host of radical reforms to correct its fiscal deficit and balance of payments.

The reforms included opening up the retail sector to foreign investment, liberalising foreign direct investment rules in the broadcasting sector, allowing foreign stakes in the country’s airline industry, and increasing the limits of foreign investment in the country’s insurance sector.

These reforms, while succeeding to improve market sentiments, did not last long, and the exchange rate of rupee against the dollar continues to remain at a high of Rs 55 a dollar.

India’s fiscal deficit, which, in other words, is called revenue-expenditure mismatch, still continues to be at a high of 5.5 percent of its gross domestic product, one of the highest compared to other similar economies.

This is due to huge subsidies on fuel, food and fertilisers the Indian government provides.

With mounting fiscal deficit, the government is under pressure from global rating agencies, as the country’s sovereign debt is at risk of being downgraded.  This year, so far, the government had spent around Rs 1.6 trillion (1,600B) as subsidies on these products.

By Nidup Gyeltshen

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