Making a case for raising prices of diesel, kerosene and LPG, the Reserve Bank on Tuesday said hike in rates of petroleum products is necessary to arrest fiscal slippages.
"Overall from the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," RBI Governor D Subbarao said in the Annual Monetary Policy Statement for 2012-13.
While petrol prices are market-linked, the government fixes the rates of LPG, kerosene and diesel, which results in a large budgetary expenditure on subsidies.
Global crude oil prices have surged since the beginning of 2012 on account of geo-political concerns in the Middle East and abundant global liquidity. The price of Brent crude rose to USD 120 a barrel in mid-April from USD 111 in January.
RBI said the Budget estimate of oil subsidy is likely to fall "significantly short of the required amount".
High subsidies are putting pressure on the country's fiscal deficit, which touched 5.9 per cent of GDP last fiscal and is pegged at 5.1 per cent in 2012-13. India imports about 80 per cent of its crude oil requirement.
The government targets to bring down the subsidy bill to below 2 per cent of GDP this fiscal and 1.75 per cent in the subsequent years. Government has made a provision of Rs 40,000 crore towards fuel subsidy for 2012-13.
"...Several upside risks to the budgeted fiscal deficit remain. Containment of non-plan expenditure within budget estimates for 2012-13 is contingent upon the government's ability to adhere to its commitment of capping subsidies," Subbarao said.