Delay in hiking petro prices to hurt deficit, says RBI

Ahead of Union Budget for 2011-12, the Reserve Bank of India (RBI) has warned that delay in hiking the prices of petroleum products and fertilisers will adversely impact the government's ability to reduce the fiscal deficit.

"Rising oil prices will impact the prices of both petroleum products and fertilisers. If the government chooses to restrict the pass-through of consumers and farmers, it will have to make adequate budgetary provisions, which will constrain its ability to reduce the fiscal deficit," the central bank said in its third quarter monetary policy review.

The government started fiscal consolidation in the last Budget, when it proposed to reduce the fiscal deficit from 6.8 per cent of gross domestic product (GDP) to 5.5 per cent in the current year.

The fiscal deficit went up from six per cent in 2008-09, to 6.8 per cent in 2009-10 on account of stimulus provided by the government to the industry to combat the impact of the global financial meltdown.

The 13th Finance Commission has recommended that fiscal deficit be brought down to three per cent by 2013-14. However, oil prices which are at over two-year high of $90 a barrel, will put pressure on inflation as well as the fiscal deficit.

The oil marketing companies have raised the prices of petrol, which was decontrolled last year, by Rs 2.50 a litre earlier this month.

However, the government did not allow any increase in the prices of diesel despite demands from the oil retailers.

The finance ministry officials are firming up the proposals for the Budget for 2011-12, which will be unveiled by Finance Minister Pranab Mukherjee on February 28.

RBI said if the government does not make up for the rising global oil prices, inflationary expectations will rise and managing it would become difficult.