Oil prices should be hiked in tandem with international prices: Subbarao

The RBI governer, D Subbarao, on the sidelines of monetary policy, has made a case for raising the prices of diesel, kerosene and LPG. The RBI is of the opinion that the government should hike oil prices to control its fiscal deficit.

Crude oil prices have been rising swiftly in the recent past. However their domestic prices have not been increased in tandem. Moreover, petrol prices even though deregulated, continue to be influenced by the government. As a result oil companies are reporting huge losses which are being catered to by the government. However this is affecting the subsidy bill and is causing the fiscal deficit to rise.

Any slippage in the fiscal deficit increases inflationary pressures that force the RBI to follow a restrictive policy. Hence the governor has made a case to restrict the subsidy bill by allowing domestic oil prices to rise in tandem with international prices.

Moreover fuelled by gold demand, crude oil prices and decelerating growth in emerging economies, India’s current account deficit (CAD), widened to 4% of GDP in April-December 2011, up from 3.3% a year ago. Also India’s fiscal deficit rose to a sharp 5.9% of GDP in the last fiscal.

The government proposes to contain it at 5.1% of GDP in 2012-13. To attain this number it has proposed to restrict the subsidy bill to below 2% of GDP this fiscal and 1.75% in the subsequent years. However this is not possible if the prices of diesel, kerosene and LPG are not hiked in the country and brought in line with international prices as India imports about 80% of its crude oil requirement.