Downgrade sword hangs, diesel prices may rise Rs 5/litre

Keen to prevent a downgrade of India's sovereign rating by Standard & Poor's (S&P), which could trigger an exodus of foreign investors, Prime Minister Manmohan Singh has told the Congress party there is no option but to raise diesel prices by at least Rs 5 a litre after the Presidential election. The current diesel subsidy is Rs 9.13 per litre sold.

Doing some tough talking at a meeting of the party core committee and with his colleagues outside, Singh explained the sequence of events that could follow a downgrade.

In 83 of 100 past cases, a negative outlook by S&P has been followed by 'junk' status to a country. S&P gives 90 days' notice to governments to take corrective action. Around two months of the notice period are left for India, after its outlook was rated negative.

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If demonstrated action is not taken to contain the fiscal deficit at the targeted level of 5.1 per cent of gross domestic product and the Indian economy gets the 'junk' tag, several pension funds and foreign institutional investors or FIIs invested in India would have no option but to pull out because they are not permitted to remain invested in a country whose sovereign rating is 'junk'.

Once they leave, they are legally mandated to stay out for at least a year, even if the rating changes earlier.

The one-time increase in diesel prices would be followed within six months by a road map for deregulation of diesel prices, government sources said.

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That is not all. To put the economy back on track, not only have the government and the party decided to appoint P Chidambaram as finance minister but his views are said to have been sought on who should succeed him in the home ministry.

Power Minister S K Shinde is one option. However, the government would need clarity on the outcome of the Adarsh housing scam inquiry before deciding on that.

Shinde is said to have suggested he would rather be considered for Vice-President, which is not an option right now.

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Therefore, Corporate Affairs Minister Veerappa Moily is the front runner for the home minister's job. He has been chief minister of Karnataka and government sources say with the institutional steps taken by Chidambaram in the ministry, it could run on autopilot for at least six months.

Singh is said to be keen to have Chidambaram in the finance ministry and has indicated he is ready to back all the decisions, including some unpalatable ones like cutting government expenditure, the new minister would necessarily have to take.

"He (Chidambaram) is the biggest comfort to me in government. We instinctively think alike," one of his colleagues quoted the PM as having said.

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This is a far cry from the tension officials noted between former minister Pranab Mukherjee and Singh on several issues, including retrospective tax and GAAR.

A new finance minister could be appointed any time between August 7 (after the election of the President on July 23 and the Vice-President on August 7) and August 20.

The government is toying with the idea of having a late Monsoon session of Parliament -- starting around August 21 -- to enable a Cabinet reshuffle before that so the economy can be steered with a firm hand.