India must prepare to hike fuel prices in line with the upward trend in global commodity markets or risk a ballooning fiscal deficit, the country's top economic adviser said Thursday.
The government's prior attempts to cut fuel subsidies in a bid to offset oil import costs have been the target of fierce public criticism, forcing it to keep prices of diesel, cooking gas and kerosene below market rates.
The country's spiralling oil import bills are partly blamed for expanding its current account deficit -- the gap between exports and goods and services imports -- to its widest level in eight years.
Basu warned that unless India slashes fuel subsidies and exposes its citizens to fluctuating global prices, it would see its deficit expand, leading to overall inflation.
"Either you expose some of that price fluctuation, you expose your consumers or you try to cover it up, in which case it comes through other prices and it hits them," he said.
Basu's words echoed a call last month by India's Prime Minister Manmohan Singh to rationalise fuel prices to ease the strain of steep oil import bills.
Singh's Congress-led government in June 2010 deregulated petrol prices in a reform aimed at reducing the massive subsidies it pays to state-run fuel refiners which rely on imported energy.
Refiners have not raised petrol prices since December 2011 but say they must unless the cash-strapped government offsets their costs. A sharp fall in the value of the rupee against the dollar has exacerbated the companies' losses.
Although the government relaxed price controls for petrol, seen as a fuel mainly used by the middle-class, it kept control of cooking gas and kerosene prices to protect the poor -- Congress's key supporters -- against price shocks.
Basu's warning that fuel prices need to rise comes as the government battles stubborn inflation, running at nearly seven percent, and a slew of corruption scandals that have badly undermined its popularity.
Last month, Standard and Poor's cut India's credit rating outlook to negative from stable, citing the country's high deficits as partly to blame, and warned of a one-in-three chance it would lose its investment grade status.
Source: AFP South Asian Edition