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Within months of a sharp increase in diesel prices, the mid-year economic review of the government has again pitched for a steep upward revision in its cost to help curb inflation, reduce fiscal deficit and enhance overall economic growth.

In its Mid-Year Economic Analysis, the finance ministry also said if there were no change in fuel price policy, the headline inflation will average over 7 per cent in the next three years.

“While with a one shot 30 per cent increase in diesel price, average inflation rate may come down to 5.68 per cent. Even with a 10 per cent increase in diesel prices, the inflation rate expects to come down to an average of 6.66 per cent during 2011-15,” the economic review, tabled in Parliament, said.

On the contrary, it suggested that any increase in the cost of diesel will lead to higher prices immediately but lower price rise in the longer run as the fiscal deficit is reduced.
It also detailed the impact of diesel price policy on the gross domestic product, saying the GDP is impacted negatively in the immediate quarters following a price rise of diesel. However, as the impact of price rise dissipates and inflation falls , the GDP increases faster.

“The GDP growth is projected to average 8.23 per cent, 8.92 per cent and 8.46 per cent during 2011-15 with a business as usual, a one shot 30 per cent increase in diesel prices and a partial 10 per cent increase in prices, respectively,” the review said.

A study commissioned by the finance ministry also indicated that the diesel consumption would reach 2681 crore litres with the business as usual or no hike in prices, it will come down to 2445 crore litres with one shot 30 per cent increase in prices and would hover around 2549 crore litres with a partial 10 per cent increase in prices in the next three years to 2015.

The government had raised diesel prices by Rs 5 a litre in September, which was steepest ever hike in the price of the subsidised fuel. The move had triggered protests from the then UPA ally Trinamool and political rivals alike.

Addressing a press conference after the review was tabled in Parliament, Chief Economic Advisor Raghuram Rajan said, there were political risks involved in hiking the diesel price, but economically it was as important.