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Our Bureau

Mumbai , Aug. 29

THE Reserve Bank of India has said that if domestic oil prices are not allowed to keep pace with the international price line, the fiscal burden of the Government could increase and also hurt investors of public sector oil companies.

In its annual report for 2004-05, released on Monday, the RBI said, "Holding back the pass-through of international oil prices to domestic prices involves quasi-fiscal cost which could eventually turn into a binding constraint for the fiscal authority."

"Spike in crude oil prices could result in increased fiscal burden in terms of duty concessions, larger petroleum subsidies or lower dividends from oil PSEs," the report said.

The RBI caution comes on a day when crude prices soared beyond $70 a barrel in the international market. The last time domestic prices of diesel and petrol were hiked was in June 20, 2005. Since then, the global oil price has increased more than 10 per cent. All the PSU oil companies reported heavy losses in the last quarter.

At the same time, the annual report, which projected brighter near-term prospects for the Indian economy, also said the pass-through of crude prices continues to remain the most critical factor influencing domestic inflation.

More than one half of the annual inflation was on account of the fuel group, even as the pass-through from international crude prices remained incomplete. Excluding the fuel group, annual inflation was 1.8 per cent as on August 6, significantly lower than headline inflation, the report said.

But the report pointed out that "underlying inflationary pressures appear to have been contained so far in the current year and inflation for 2005-06 is expected to remain in the range of 5-5.5 per cent as projected in the RBI's annual policy."

Referring to the performance of the economy, the report said leading macro-economic indicators suggested that the Indian economy is poised to build upon the gains secured in the last fiscal.

Backed by strong growth in non-food credit, capital goods imports and vibrant capital markets, the Indian industry is likely to remain buoyant in 2005-06.

However, the report said that, despite strong export growth, the trade deficit is expected to be higher in 2005-06 mainly on account of oil and non-oil imports. For the year as a whole, while invisibles surplus may finance a large part of the enlarged trade deficit, the current account deficit is expected to widen within acceptable limits that can be financed by normal capital flows.

The report said credit off-take has been quite robust so far. The demand for bank credit remained strong with year-on-year non-food credit growth of commercial banks reaching 30.2 per cent as on August 5, on top of 24.4 per cent a year ago.

The data available for the first two months shows that credit to industry, housing and real estate continued to record strong growth.

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