India’s newly appointed Chief Economic Advisor Raghuram Rajan has advocated decontrolling diesel prices rather than increasing the tax on diesel vehicles.

In his first formal media interaction, Rajan said, “The best policy is (to) move towards true cost of the fuel. The problem with diesel versus petrol is not the vehicle but the fuel cost. If we can bring both (petrol and diesel) to international prices or market prices, then people would make a choice.”

He further said that creating a new distortion by changing the price of diesel vehicles is a “sort of second-best” solution. “If you can’t move prices towards international levels, then you may resort to differential tax on vehicles. It is best that the problem is tackled directly,” Rajan added.

His remarks come at a time when the Government has increased diesel price by Rs 5/litre (including an excise duty hike of Rs 1.50), causing massive political outbursts and even withdrawal of the TMC from the UPA. Interestingly, the Government on June 25, 2010 took a decision ‘in principle’ that the price of diesel would be made market-determined, both at the refinery gate and the pump level.

This issue has also become important as the share of diesel vehicles in the total number of passenger cars, utility vehicles and vans sold has gone up. In the first five months of the current fiscal (April-August), of the 10.6 lakh cars sold, 53 per cent were diesel vehicles.

Cautioning against overdependence on FIIs (foreign institutional investments), Rajan felt the Government should focus on FDI (foreign direct investment) and open more sectors to such inflows.

“We have to be careful not to be overly dependent on external investors… this is an environment when the external investor is quite fickle,” he said. Betting high on India’s reform initiatives, foreign investors have pumped in more than Rs 9,000 crore (about $1.67 billion) into the country’s equity market this month.

“The safest form of financing is through FDI, without any doubt because it is long term. To the extent we can open up more to FDI... there will be efficiency, because there will be more competition in the local economy,” he explained.

Last week, the Government libearlised FDI norms in retail (both multi-brand and single brand), aviation, broadcasting and in power exchanges. Now, there is talk about hiking the FDI cap in insurance to 49 per cent from 26 per cent. “More FDI is a good thing at this point, not in every sector but in many sectors ... So, in general, there is scope for more FDI in many sector, like insurance,” he added.

Fight inflation with more milk, eggs

Raghuram Rajan has a new idea to fight inflation — increasing production of milk, bread, eggs, and so on. The headline inflation, technically known as Wholesale Price Index (WPI), stood at 7.55 per cent in August against 6.87 per cent in July and 9.78 per cent in August last year.

Talking to newspersons, he said, “One of the concerns of the last few years has been food inflation, which has been not so much within the control of the Government. This is… because our population has become richer, a good thing, and therefore has demanded more high-end food products such as milk, eggs, meat rather than the cereals.”

He felt that in order to rebalance or reduce food inflation, “we have to produce more of such products”. “So, productivity is going to be part of fighting inflation,” he said. He also admitted that lower kharif sowing is going to add pressure on inflation.

> shishir.sinha@thehindu.co.in

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