NEW DELHI, Sept 14 (Reuters) - After raising subsidised
diesel prices despite heavy political opposition, the Indian
government may go further in reviving its stalled reform agenda
on Friday when it weighs allowing foreign direct investment in
its battered airlines.
India's decision late on Thursday to raise diesel prices by
14 percent, the first such move in 15 months, is aimed at
shoring up a weakening fiscal position, but has already come
under intense fire from both the opposition and allies within
the ruling Congress party-led coalition.
While the move will add to inflation in the short term, it
will ultimately make it easier for the central bank to loosen
monetary policy and help revive investor confidence damaged by
political gridlock in New Delhi.
"It is a bold move, and will send a strong signal to the
Reserve Bank of India on the government's efforts at fiscal
consolidation," said Anubhuti Sahay, an economist at Standard
Chartered Bank in Mumbai.
While most other G20 central banks are trying to ease
monetary conditions to counter a global slowdown, the RBI has
consistently flagged high inflation as a key risk to an economy
where growth is faltering.
Data due at 0600 GMT on Friday is expected to show wholesale
prices rose 6.95 percent year-on-year in August,
slightly higher than July's 6.87 percent, according to a Reuters
poll of 32 economists.
INTEREST RATE MOVE?
The diesel decision was welcomed by investors.
"This is a positive signal because it shows the government
is ready to move. But this is only the first step, and lot more
needs to be done to bridge the fiscal gap," said Indranil Pan,
chief economist at Kotak Mahindra Bank in Mumbai.
On Monday, the RBI is expected to leave interest rates on
hold, although several market players said the diesel move adds
to the possibility of the first rate cut since April.
"All these days RBI was insisting the government should take
steps to control the fiscal deficit. After this move there are
all possibilities that the central bank may consider to reduce
interest rates on Monday," said R.K. Gupta, managing director of
Taurus Mutual Fund in New Delhi.
India has set a target to cut its fiscal deficit to 5.1
percent of GDP in the financial year that ends in March, a goal
many economists say it is unlikely to meet.
India's inability to push through major reforms and ease its
subsidy burden puts it in danger of becoming the first of the
big "BRICS" emerging economies to see its credit rating
downgraded to junk.
Later on Friday, the Indian cabinet is expected to consider
a proposal to allow foreign airlines to buy stakes in local
carriers, a long-stalled move aimed at revitalising the
country's debt-ridden domestic carriers, although overseas
airlines have shown little interest in investing.
Under current rules, foreign airlines are barred from buying
stakes in domestic carriers, although foreign investors are
allowed to hold a cumulative 49 percent. If the proposal is
approved, foreign airlines would be allowed to buy similar-sized
Whether the diesel price hike sticks remains to be seen.
A leading partner in the ruling coalition announced a
protest march at the weekend and the main opposition party
called the move "financial terror". Protests earlier this year
over petrol price and railway fare hikes prompted Singh to
partially roll them back.
(Reporting by Rajesh Kumar Singh, Nidhi Verma and Manoj Kumar;
Writing by Tony Munroe; Editing by Alex Richardson)