James Lamont is the FT's South Asia bureau chief; Amy Kazmin is South Asia correspondent for the FT
One of India's top economic policy makers has called for a dramatic cut in energy subsidies to expose the population to real fuel prices and reduce pressure on the country's fiscal deficit.
Montek Singh Ahluwalia, deputy chairman of the powerful planning commission and closest aide to Manmohan Singh, the prime minister, urged the Indian government on Tuesday to take "hard decisions" to pass on rising energy prices to consumers.
He said the Congress party-led government had to convince itself that it could run a fast-growth economy with high energy prices, and break with pricing policies that have used cheap power to spur growth, which reached 8.6 per cent in the last fiscal year.
"The only strategy is to pass on the rising [energy] prices to the consumer, as painful as that might be," Mr. Ahluwalia said. "No strategy that fails to pass on high energy prices will be consistent with high growth."
Mr Ahluwalia warned that the distortions created by energy subsidies were crippling India's state-owned oil companies. The country depends heavily on imported oil. "Low prices are killing the energy sector [at a time of high crude prices]," he said.
India spends about 9 per cent of gross domestic product on energy and other subsidies. In 2008 energy subsidies totalled $41-billion, or 3.4 per cent of GDP, and the country's per capita oil subsidies are three times as high as China's. The subsidies are viewed by economists as a cost India can ill-afford as it balances a reduction in the fiscal deficit with the need to spend more on infrastructure, health and education.
The government has taken steps to liberalize the price of gasoline, which has risen 41 per cent since February of last year. But New Delhi has balked at raising state-controlled diesel prices, fearing the inflationary impact of a rise in the price of the fuel that powers the nation's trucking fleet.
India suffers the highest inflation of any big Asian economy. The inflation rate rose to 9.06 per cent in May, according to data released on Tuesday, adding to pressure on India's central bank to raise interest rates this week. In April, the index rose by 8.66 per cent.
In its India Economic Survey on Tuesday, the Organisation for Economic Co-operation and Development recommended the phasing-out of diesel subsidies and the conversion of kerosene and liquefied petroleum gas subsidies into cash payments to the poor
Angel Gurría, the OECD's secretary-general, said India could learn from Indonesia, where President Susilo Bambang Yudhoyono's administration cut subsidies between 2005 and 2008 yet maintained political popularity.
Subsidy reform was "very central" to what the government considered it could achieve before parliamentary elections in 2014, Mr. Ahluwalia said. But others are concerned that the government has lost momentum as it battles high-profile corruption scandals.
"Business confidence is sagging precipitously," said Saurabh Mukherjea, head of equities at Ambit Capital in Mumbai. "Unless there's progress in the next couple of months, growth might fall below 7 per cent."