New Delhi: Government's decision to hike diesel price will change the perception of the global rating agencies which had threatened to downgrade India's sovereign rating, said Planning Commission Deputy Chairman Montek Singh Ahluwalia.

"The perception of the rating agencies that India cannot raise diesel prices will change. Rating agencies should take a good look at it. The fiscal space which has been created is quite substantial", he told reporters.

The government, Ahluwalia further said, has done the "right thing" by raising diesel price by Rs 5 per litre and restricting supply of subsidised LPG cylinders to six per family per year.

"We have done the right thing. The rest is up to the RBI (to do)", he said referring to the forthcoming mid-quarterly review of monetary policy to be announced on Monday.

India Inc has been demanding cut in interest rate to boost economic growth which had slipped to nine-year low of 6.5 percent in 2011-12.

Global rating agencies including Standard and Poor's and Fitch had threatened to lower India's sovereign rating to speculative grade citing reasons like rising fiscal deficit and policy paralysis.

"There is no doubt in my mind that the adjustment in diesel price represents creation of fiscal space...One of the problem people earlier felt was that the fiscal situation of the country lacks credibility because there was a sort of impression that diesel prices cannot be raised. The signal that has been given is very good", Ahluwalia said.

On the impact of diesel price hike on inflation, Ahluwalia said, "it is not necessary that the diesel price hike would result in increase in price of other commodities. It could be possible that prices of one or two items may go up.

"But it will not be appropriate to say that keep diesel prices low, continue subsidy and destroy petroleum companies...this arrangement would keep a tab on inflation... (but) this is not correct", he added.

Admitting that hike in prices always creates problem, Ahluwalia said, "we should not have an impression that not raising diesel prices is a cost less option. The real question is that could the government have afforded not to raise the diesel prices".

Country has to move into a situation where energy security assumes importance, he said, adding, "we need both...to economise on energy ...and put resources into exploration, production and development. It is very difficult to do that it you allow the petroleum companies to bleed".

Low diesel prices will either raise subsidy or make petroleum companies bankrupt, he said, adding, "you have to deregulate oil prices. The other nations who are import dependent for petroleum, are doing the same".

The average inflation in the five-year Plan period is estimated to be 6 percent, he said.

The macro balances of the economy should be such that it it supports investment level that the government has been planning, Ahluwalia added.

Inflation could also be triggered by rise in global commodity prices, he said, adding: "I expect energy prices to remain high".

As regards the growth, Ahluwalia said, "we do want an acceleration of growth....Growth momentum is low. 12th Plan lays out that the short term goal should be to revive growth momentum".

The full Planning Commission, which is headed by Prime Minister Manmohan Singh, is expected to approve the 12th Plan document which seeks to raise the average annual growth rate to 8.2 percent from 7.9 percent recorded in the previous Plan period.

"We think that with the lot of hard work and taking tough decisions, and diesel price hike is one of those tough decision, but we need a lot of tough decisions, I think we can reach 8.2 percent and I think it will be inclusive," he said.

Ahluwalia further said the meeting of the full Plan panel will also discuss the recommendations of the B K Chaturvedi committee on revamping the centrally sponsored schemes (CCS).

(Agencies)

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