Dismissing the perception of policy paralysis surrounding the union government, Planning Commission Deputy Chairman Montek Singh Ahluwalia feels the government should raise petroleum prices as part of tough decisions and to attract international investment.

He feels people must be educated on the importance of raising fuel prices so that petroleum sector does not go bankrupt.

"I would certainly hope so. Certainly all the advice that we would be giving (to the government) is that India has tremendous opportunity to look good and to attract investment in a world which is very uncertain and we should not miss that opportunity," Ahluwalia said in an interview.

He was asked whether the government would be willing to take tough decisions to put its economy on the path of high growth. He underlined the need for restoration of fiscal credibility, action on the underpriced petroleum products and taking care of implementation bottlenecks in infrastructure projects as being measures that should be very high on the government's agenda.

"Even if a little block is removed, it will create a revival of confidence that the country is on the right track," he added.

Ahluwalia said the view in the Planning Commission on fuel subsidies is very clear that ‘fuel prices just have to be adjusted’.

"It is obvious from a technical and economic point of view, the case is absolutely overwhelming. In practice, political realities also have to be taken into account and governments very often have to decide when they want to do it. There is absolutely no doubt in my mind we just have to raise fuel prices," he said.

In the case of petroleum, 80 per cent of the fuel is imported "so not to charge for the price which you are being made to pay is basically bankrupting the petroleum sector. Either that or the budget has to bear a huge burden of subsidy and neither of those is sensible."

On concerns over India's high current account deficit, Ahluwalia said the size of the CAD is higher than what India is normally comfortable with. "A three per cent is a little on higher side and I will be a lot more comfortable with two and a half per cent. But if for a couple of years, you have to do three per cent mainly because oil prices until very recently were fairly high.

"I do not think that is a disastrous situation provided you can attract FDI and long-term capital flows," he said.

"The trouble is when you have a lot of global uncertainty, all these things become uncertain. So, you get pressure on the rupee," he added.

Ahluwalia noted that uncertainties in Europe have resulted in a very volatile international situation, one that has not been seen before and in which developing countries are being hit in different ways.

"The rupee has appreciated at certain times, this time it has depreciated," he said on the depreciation of the Indian currency which touched all time low of over 54 against dollar last week.

Noting that India does not follow a policy that anchors the rupee, Ahluwalia said the whole assumption is that market forces will be allowed to work, but the government will step in when it thinks the exchange rate has overshot.

He said the RBI, which has a lot of ‘ammunition’ that it can use, has so far done the ‘right thing’ in the way it has managed the currency fluctuation.

"I would hope that the rupee would not see any large depreciations or jumps. I would not particularly say that I am keen for it to appreciate either. Let the market push it one way or the other and as long as those movements are small I do not think there is too much to worry about."

Ahluwalia also stressed that inflation should be kept under tighter control.

"Inflation at seven per cent is too high. Ideally, we would want inflation to be stabilised round 5-6 per cent, so I think we need to bring inflation down a little more. What is going to do that to a large extent also depends on the supply side. It is not just a demand side factor," he added.

He pointed out that the real issue is a ‘quick return’ to certainty in the financial markets in general, particularly in the context of Europe. The ‘real danger’ in the European case is not a slow growth, but since the financial uncertainties are not being properly managed, there is real risk of ‘financial disruption’, which could have a spill over effects internationally.