Justifying the hike in oil prices Finance Minister Pranab Mukherjee has said it was an all important step to meet under-recoveries of oil marketing companies (OMC).

Interacting with the media in Mumbai on Monday, Mukherjee said, “The enhancement of prices of essential commodities is always unpleasant but the bullet had to be bitten.”

He said that though the prices of petrol will be market-determined, a gap of 1.49 percent still existed on prices of the diesel and  in spite of  this hike, the subsidy on LPG would be Rs 227 and the subsidy on kerosene nearly Rs 14.80.

Answering a question on the effects of inflationary pressure due to increase in fuel prices, Mukherjee  admitted there would be cascading effect of inflationary pressures on all products, as the cost of transport will also increase.

Mukherjee  added that according to the chief  economic advisor, the direct impact of inflation would be above 0.9 percent. “However, the overall inflationary pressure would moderate by mid-July, particularly the food inflation and inflation for primary articles. Inflation would reduce to a moderate level by the year-end,” he said.
 
Referring to the G20 summit, the finance minister said that nations with market compulsions would go for immediate fiscal consolidation. For the rest of the countries, the withdrawal of the stimulus package would be nation-specific.

With regards to the possible interest rate hike corresponding to the inflationary buildup of economy, Mukherjee said that interest rate reviews are left to the Reserve Bank of India which determines  the monetary policy.

Speaking on the sidelines at the event, State Bank of India chairman Om Prakash Bhatt said, “The base rate will be 8 percent or less” and added that all loans will be priced similar except that the linkage will shift from the PLR to the base rate  and as and when they are due for renewal  that time they will shift over to the base rate.

Bhatt admitted that now it will be expensive for some borrowers to borrow and added that so far the banks have borrowed Rs 70,000 crores  from the RBI. “Beginning June first week, almost overnight,  there has been a dramatic shift  from surplus liquidity to deficit,” he said.
 
Later in the evening, speaking at the CNBC Consumer Awards Function Mukherjee highlighted that  economic  recovery had taken firm roots with growth in 2009-10 at 7.2 percent as per advance estimates of the CSO (now placed at 7.4 percent). “The medium term fiscal policy statement envisages a reduction in the level of fiscal deficits of the centre to 4.8 percent of GDP in  2011-12 and 4.1 percent of  GDP in 2012-13,” he said.
 
Crediting  economic recovery to the efforts of economic agents and the affirming success of the  governments initiatives like NREGA and Sarva Shiksha Abhiyan, amongst others, Mukherjee  expressed confidence that the medium term outlook for the economy is bright.