UPDATE 1-India's diesel price move to test stomach for reforms

Fri Sep 14, 2012 11:21am IST

(Updates throughout)

By Frank Jack Daniel

NEW DELHI, Sept 14 (Reuters) - India's beleaguered government appeared poised on Friday to push ahead with measures to revive the economy after months of dithering, even as it came under heavy fire from allies and opponents alike for raising heavily subsidized fuel prices.

A Cabinet committee was due to consider a proposal to allow foreign airlines to buy shareholdings in local carriers and will also discuss selling stakes in large state-run companies such as Oil India. Another committee is due to speed up infrastructure project approvals.

Two government sources said India was likely to announce spending cuts on Saturday for the 2012/13 fiscal year to March.

India's inability in the past months to push through major reforms and ease its subsidy burden has put it in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.

India's decision late on Thursday to raise diesel prices by 14 percent, the first such move in 15 months, is aimed at shoring up a weak fiscal position, but it has already come under fire from the opposition and allies within the ruling Congress party-led coalition who see a chance to hurt the government.

One powerful coalition partner vowed street protests from Friday, and parties from Communists to right-wing Hindu nationalists joined householders demanding a rollback on diesel and on a cap in sales of subsidized cooking gas canisters.

"With the increase in diesel prices, children's school bus fares are going to increase and prices of every essential items will increase. God knows how we are going to manage with our limited income," said housewife Manu Das in the northeastern state of Assam.

Similar protests earlier this year over petrol price and railway fare hikes prompted Prime Minister Manmohan Singh to partially roll them back.

While the measures will add to inflation in the short term, it will ultimately make it easier for the central bank to loosen monetary policy and help revive investor confidence damaged by political gridlock in New Delhi.

"It is a bold move, and will send a strong signal to the Reserve Bank of India (RBI) on the government's efforts at fiscal consolidation," said Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai.

While most other G20 central banks are trying to ease monetary conditions to counter a global slowdown, the RBI has consistently flagged high inflation as a key risk to an economy where growth is faltering.

Data due at 0600 GMT on Friday is expected to show wholesale prices rose 6.95 percent year-on-year in August, slightly higher than July's 6.87 percent, according to a Reuters poll of 32 economists.

In the cabinet committee meetings later on Friday, ministers will look at loosening rules that bar foreign airlines from buying stakes in domestic carriers. At the moment foreign investors, excluding airlines, are allowed to hold a cumulative 49 percent. If the proposal is approved, foreign airlines would be allowed to buy similar-sized shareholdings.

INTEREST RATE MOVE?

The diesel decision was welcomed by investors.

India's benchmark BSE index rose 2 percent as of 0346 GMT led by the state-owned oil companies that are the main beneficiaries of the new prices. Bharat Petroleum Corp Ltd surged 4.6 percent.

"This is a positive signal because it shows the government is ready to move. But this is only the first step, and lot more needs to be done to bridge the fiscal gap," said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

Morgan Stanley, said the fuel price measure was "a positive development" but did not change its estimate that the fiscal deficit would reach 6.1 percent of GDP this year.

Some economists said Thursday's fuel price hike would have a marginal impact on the deficit, which is at more than half the full-year target of 5.1 percent of GDP in just first four months of the fiscal year.

The government estimates the changes will reduce losses by about 203 billion rupees ($3.66 billion) for the remainder of the fiscal year. But a reduction in excise duty on petrol may mean the net impact on government finances will be lower.

Even after the latest price hike, state-run oil marketing companies will suffer losses of 1.67 trillion rupees in 2012/13 for selling fuels below market rates, higher than 1.39 trillion rupees incurred a year ago, the government said.

On Monday, the RBI is expected to leave interest rates on hold, although several market players said the diesel move adds to the possibility of the first rate cut since April. ($1 = 55.4100 Indian rupees) (Reporting by Rajesh Kumar Singh, Nidhi Verma and Manoj Kumar; Writing by Tony Munroe; Editing by Alex Richardson and Ross Colvin)