With rising crude oil prices widening the gap between the retail fuel price and their cost of production, the Reserve Bank of India on Tuesday called for an immediate hike in petrol and diesel prices, even if it adds to inflationary pressure and moderates economic growth.
"The critical assumption that petroleum and fertiliser subsidies would be capped is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the RBI believes that this needs to be done as soon as possible," RBI governor D. Subbarao said.
Releasing the monetary policy statement for 2011-12, he added that the failure to increase retail prices would increase the government's fiscal deficit.
The government has not allowed state oil firms to revise diesel prices since June 2010 when crude oil was ruling at $72-73 per barrel. Crude oil is today trading at over $110 a barrel in international markets.
Diesel prices will need to be hiked by over Rs 18 per litre if retail prices are to be brought at international parity and the June, 2010, decision of freeing its prices from government control is implemented.
Also, the government has not allowed oil firms to hike the price of petrol, a commodity which was freed from control in June last year. Petrol is currently being undersold by Rs 8.50 per litre.
In addition, domestic LPG and kerosene, too, are sold at an artificially lower price. Unchanged prices of diesel, domestic LPG and kerosene would mean that the government will have to find ways to meet the over Rs 1,80,000 crores revenue loss projected for the current fiscal.
Subbarao said the currently prevailing high crude and commodity prices have been taken into account while projecting the 8 per cent GDP growth for this fiscal.
"Going forward, high oil and other commodity prices and the impact of the RBI's anti-inflationary monetary stance will moderate growth," he said.
The RBI said that it has arrived at an 8 per cent projection for GDP growth by factoring in international crude prices at an average of $110 per barrel for the full 2011-12 fiscal year.
Subbarao said the rising commodity prices are going to affect all the emerging economies.
In its report, the central bank admitted that global crude prices remain volatile.
"The outlook for crude oil prices in the near future is uncertain given the geopolitical situation in the West Asia and North Africa (MENA). In any case, the likelihood of oil prices moderating significantly is low," Subbarao said.
The recent conflict in Egypt and Tunisia, followed by theongoing civil war in Libya, has taken global crude prices to a high of over two-and-a-half years.
The RBI said that prices of oil, along with some other commodities like minerals, fibres, rubber and coal, will shape the inflation outlook.
"To the extent the increase in input prices translates to output prices, it will have an influence on the inflation path," Subbarao said.
Inflation has stood above 8 per cent since January, 2010, and the RBI said that it is likely to average 9 per cent during the first half of the current fiscal, before moderating to around 6 per cent in March, 2012.