The government's decision to hike petrol and diesel rates will not impact inflation, energy giant BP Plc said, hailing deregulation of fuel prices as the right step towards eliminating subsidies and making India an attractive place for investment.
"Contrary to some of the discussions here, this will not have a negative impact on the market economy, specifically not on inflation," BP Plc Group chief economist Christof Ruhl said.
The government last month announced freeing of auto fuel prices from its control, resulting in a Rs 3.50 per litre hike in petrol prices as domestic rates got linked to global movements.
Diesel rates were increased by an ad-hoc Rs 2 per litre, with full global linkage put off for a later date.
"One has to understand that first of all, if there is a jump in prices, that is a one-off jump which does not impact inflation per se.
"Secondly, having subsidies in the system is more inflationary, because if you have a subsidy in a country like India, it is going to be financed by government deficits or printing money, both of which are inflationary means," he said.
In 2008, 80 per cent of all oil products from the non-OECD economies were subsidised.
That means that the entire growth in oil demand came from countries which subsidised their final products.
By 2009, before India took that step, it had already gone down to 40 per cent.
"And India joining that is a very important signal for other countries and it puts India sort of in the right trend rather than with those minority, who will maintain subsidies and who will just pay the bill later," he said.
Ruhl said higher fuel prices mean they are no longer financed by the government, but by the private sector.
"It is unpleasant for consumers during the transition, but market economy has positive impacts, not negative impacts."
The decontrol would not only mean less subsidies, but also clarity and transparency in the market economy.
"They all work in the same direction, making it a more attractive place to invest in. I think that was a very important step of India to take.
"The removal of subsidies is positive, because in a normal economy, prices should give right signals. High prices mean there is not enough for whatever it is available. If prices are low (that) means there is enough.
"When you have subsidies in the system, you create artificial demand which otherwise wouldn't have been there and you would distort the market signals," he said.
Ruhl said the freeing of petrol and diesel prices means India has joined a growing number of countries which are eliminating subsidies.
"And more importantly, it has joined a group of countries which eliminate subsidies for all the right reasons, not so much of fiscal cause and climate change, but for the economic reason," he said.
A subsidised energy sector in general creates capital stock of factories and plants which are inefficient.
And these capitals goods are around for 20 to 30 years. "So to change that now makes India more competitive towards other countries in the future and that is, I think, crucial," he said.
