Even as crude oil prices touched the critical $70 per barrel level on Monday, the Reserve Bank of India (RBI) warned that high oil prices remained the most critical factor influencing domestic inflation. It cautioned that any complacency in managing price stability could hurt growth.The RBI, in its annual report for 2004-05, said the Indian economy was poised to build upon the gains in macroeconomic performance secured in 2004-05. But it cautioned that rising crude oil prices could impact output, prices, competitiveness and disposable incomes in the country.By not raising domestic fuel prices and aligning them to global trends, the government’s fiscal burden was likely to rise and eventually hurt its finances, it said. “Holding back the pass-through of international prices to domestic prices involves quasi-fiscal costs which could eventually turn into a binding constraint for the fiscal authority,” the RBI said.The RBI warning has come at a time when oil marketing companies are making huge losses due to under-recoveries and the government is reluctant to raise fuel prices due to opposition within the ruling coalition.“Spikes in crude oil prices could result in increased fiscal burden in terms of duty concessions, larger petroleum subsidies or lower dividends from oil public sector enterprises,” RBI said.Crude oil prices have risen more than 10 per cent since the government raised petrol and diesel prices in June. Last week, Finance Minister P. Chidambaram said India would have no alternative but to raise fuel prices if oil prices continued to rise. If crude oil prices remain high and the government does not hike prices, oil PSUs are expected to incur a loss of Rs 30,000-40,000 crore in the fiscal year to March 2006.The report said while the average price of a basket of major international crude varieties in April-July had risen 44.1 per cent over the previous year, Indian petrol and diesel prices had increased by only 22.4 per cent in the same period.“Maneuverability on oil prices is getting limited and corporates have a higher probability of gaining their pricing power with a better industrial outlook. The pricing pressure, if it were to occur from supply side, could get complicated by overhang of the excess domestic liquidity,” RBI said.However, on a brighter note, it said the revival of South-West monsoon, robust strengthening of manufacturing activity, high corporate profitability, buoyant equity markets, robust merchandise exports and imports, sustained demand for non-food credit and services sector all point to a brightening of the economy’s near-term prospects.
