New Delhi: India needs to raise prices of subsidised fuels to achieve the budgeted fiscal deficit target of 4.6% of GDP for the current fiscal year to end-March 2012, the Prime Minister’s economic adviser C. Rangarajan said on Thursday.
New Delhi has budgeted a fuel subsidy bill of $5.2 billion for 2011/12, assuming oil prices below $100 per barrel. Oil prices are near $118 a barrel after OPEC members on Wednesday failed to agree to raise output.
Analysts say an increase in prices of diesel, kerosene and cooking gas will help the government cap its subsidy bill, as every $10 increase in oil prices has the potential of increasing the fiscal deficit by around 0.2% of GDP.
“The review of administered prices particularly of petroleum products is necessary,” Rangarajan said. “It is required primarily from the point of view of maintaining the fiscal deficit.”
“Prices could be raised to the extent the upstream companies can provide support to (oil marketing) companies,” he said.
The ruling Congress party has been on the back foot for the past year over rising prices of food and fuel, which have triggered street protests, and raising diesel prices would be politically unpopular for a party whose core voters are rural and poor.
It has repeatedly sidestepped a decision on lifting state-set prices of fuels, fearful of stoking inflation at a time when public anger is running high over graft scandals.
The government urgently needs to raise fuel prices to meet its fiscal deficit target for the current fiscal year as sagging economic expansion is seen depressing growth in tax revenue, analysts say.
“The government has to either raise prices or give us higher compensation. Our borrowings are rising by Rs 2000-2500 crore a month. It will be difficult to sustain,” said R.K. Singh, chairman of BPCL, India’s second-largest state-run refiner.
He said BPCL’s current borrowings stood at Rs 23000 crore.
India has allowed state-run oil firms to fix the price of petrol but continues to control the prices of diesel, kerosene and cooking gas to protect the poor and keep inflation in check.
Rangarajan, a former governor of the Reserve Bank of India, favoured maintaining subsidies at the budgeted levels. India will spend Rs 1.44 trillion ($32 billion) on subsidies including those on fuel.
“Cutting the expenditure must be essential for maintaining the subsidies at (the) budgeted level,” he said.
Rangarajan also said headline inflation would likely ease slowly until October, but added a normal monsoon will moderate food inflation in a few months.
India’s annual food inflation accelerated to 9.01% in the week to 28 May, its highest in nine weeks, from 8.06% in the previous week.
He expects headline inflation at 6.5% by end-March. It was at 8.66% in April—above the central bank’s comfort zone of around 5%.