Crude price hike delay to bleed govt coffers

The Reserve Bank of India (RBI) has warned that restraining pass-through of international oil prices into domestic prices will hurt government finances.

In its 2004-05 Annual Report, RBI said, "Holding back the pass-through of global oil prices involves quasi-fiscal costs which could eventually turn into a binding constraint for the fiscal authority."

The central bank further comprehends that spiralling global crude oil prices and capital flows also exercise a considerable amount of impact on the domestic fiscal scenario.

In this context, rising crude prices in turn could lead to duty concessions, larger petroleum subsidies and lower dividends from public sector oil companies, all of which imply an increased fiscal burden.

The Fiscal Responsibility and Budget Management Act envisages a revenue deficit at zero per cent of the gross domestic product. The realisation of this target, points out the RBI, would crowd-in private investment, by creating more resources for public investment.

The central bank, however, foresees that with the revenue deficit at 2.6 per cent in 2004-05, the total elimination of this category by 2008-09 would prove to be especially cumbersome.

Realising this target would involve a complete focus on restricting expenditures, increase in tax revenues and lowering of tax exemptions, it said.

Further, with the non-tax revenue slated to decline in the recent future, the RBI opines that revenue augmentation would critically depend upon improvement in the tax/GDP ratio.

Evaluating the impact of oil prices on inflation, in the absence of any countervailing policy intervention, every US dollar increase in crude oil prices could potentially add 15 basis points to the WPI inflation as a direct impact and another 15 bps indirectly.

The rise in domestic headline WPI inflation during the first half of 2005 primarily reflected huge supply side shocks, arising out of high international commodity prices. The consumer price inflation on the other hand, rose from 3.5 per cent in March 2004 to 4.2 per cent in March 2005.

On the whole, the consumer price inflation remained moderate vis-a-vis WPI inflation during 2004-05, necessarily reflecting the latter's supply side nature and absence of demand side pressures in the economy.