The Chief Economic Advisor, Dr Kaushik Basu, today pitched for freeing of diesel prices and said it would eventually cool down inflation, which should ideally be below five per cent.

“I personally believe that we should decontrol diesel prices, which will take some pressure off the fiscal burden; and in the long run, it will cause inflation to go down,” he told PTI in an interview.

While petrol prices are market-linked, the Government decides the prices of LPG, kerosene and diesel, which usually results in a large budgetary expenditure on subsidies.

Oil marketing companies increased petrol prices by Rs 1.80 a litre on late Thursday night. The Finance Minister, Mr Pranab Mukherjee, has acknowledged that the hike in petrol prices will have some impact on inflation.

The Petroleum Minister, Mr S. Jaipal Reddy, has sought a meeting of a high-powered ministerial panel to decide on revising the rates of diesel, domestic LPG and kerosene as oil companies are suffering losses on the sale of these fuels. Prices of the cooking fuel and diesel were last revised in June.

At a time when inflation is hovering near double digits, it is feared that any hike in prices of diesel will further aggravate the situation. In September, headline inflation was measured at 9.72 per cent.

“However, (it is) important to explain to our people that if we subsidise diesel artificially, by running up a large fiscal deficit, that would also exert an upward pressure on prices,” the Chief Economic Advisor said. Mr Reddy has sought a meeting of the Empowered Group of Ministers (EGOM) to devise ways to cut the mounting losses to oil marketing companies due to the pricing of diesel, domestic LPG and kerosene as oil companies.

Dr Basu, who also heads a Prime Minister-appointed panel on inflation, said deregulating diesel prices will make India a more responsible country environmentally, because then “we will not encourage over-consumption of diesel”.

On inflation, he said bringing it down is a priority.

“I would like Indian inflation to be kept firmly below five per cent. In fact, I would like a target of four per cent. That gives you flexibility for relative price adjustment and also purchasing power parity adjustment, which is natural during high growth,” he said.

The CEA, however, admitted that India won't be able to bring down inflation to the target of five per cent by the end of the fiscal.

“But if we can reach five per cent or less sometime toward the end of the next calendar (2012), that would be good,” he added.

The Reserve Bank has hiked interest rates 13 times since March, 2010, in its bid to tame inflation, a cause of big concern for the Government.

The central bank expects inflation to moderate to seven per cent at March-end and Dr Basu agrees with the forecast.

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