Making a case for hiking oil prices, the Reserve Bank on Monday said delay in adjustments with global prices could pose a threat to government finances.
"Fertiliser and oil subsidies are likely to exceed budgetary provisions and generate pressures on fiscal situation in case there is a delay in adjusting the domestic prices to rise in international prices," RBI said in the 'Macroeconomic and Monetary Developments 2010-11', released today.
The government, in June last year, freed petrol pricing and allowed oil companies to fix rates on the basis of market forces. However, it kept diesel and LPG rates under its control.
"The rising international oil prices may generate pressure on the fiscal situation in case there is a delay in the corresponding adjustment in domestic prices, leading to larger subsidy expenditure towards under recoveries of oil PSUs," RBI said.
There is an upside risk in the case of fertiliser subsidy as fertiliser input prices have increased. "Fertiliser subsidies are likely to exceed budgetary provisions unless urea prices is decontrolled", it said.
The report said that lower projection of subsidies for 2011-12 in the Budget is subject to the assumption that there would be no major variation in international fertiliser and petroleum prices during the fiscal.
The Budgeted annual subsidy bill for petroleum products is Rs 23,640 crore and for fertilisers it is Rs 49,998 crore.
Global crude oil prices are hovering at over $120 a barrel.
The report said that even as the Centre is striving to reduce its deficit indicators, however, it is likely to remain higher than that projected by the 13th Finance Commission.
"...the government will not be able to achieve revenue balance by 2013-14," it said.
The Commission has recommended that fiscal deficit be brought down to 3 per cent of GDP by 2013-14 end, while revenue deficit is to be eliminated by the same year.
Finance Minister Pranab Mukherjee in his Budget Speech has pegged revenue deficit for the current fiscal at 1.8 per cent of GDP.