RBI wants government to deregulate diesel price

January 24th, 2012 - 8:47 pm ICT by IANS  

Mumbai, Jan 24 (IANS) The Reserve Bank of India (RBI) Tuesday suggested that the government deregulate the price of diesel fully to help contain aggregate demand and the trade deficit that has widened to $133.3 billion in the first nine month of the current financial year.

“Particularly as the food subsidy bill is expected to rise, it will be prudent to fully deregulate diesel prices to contain both aggregate demand and trade deficit,” the central bank said in the third quarter review of its monetary policy for 2011-12.

Diesel is heavily subsidised by the government. Oil marketing companies incurred under-recovery of Rs.12.95 on sale of each liter of diesel in the first fortnight of January, according to data provided by the ministry of petroleum and natural gas.

Oil marketing companies suffered under-recovery of Rs.37,719 crore on sale of diesel in the first half of the current financial year, which is more than half of the total Rs.64,900 crore of under-recovery on all the petroleum products.

The RBI said heavy subsidies on petroleum products have led to widening in fiscal deficit.

“Revision in domestic administered prices will add to inflationary pressures, although such revisions are necessary to maintain the balance between supply and demand,” the RBI said.

The RBI pointed out that the fiscal deficit of the government has remained at an elevated level since 2008-09.

“If the increase in government borrowing already announced is an indication, the gross fiscal deficit for 2011-12 will overshoot the budget estimate substantially,” it said.

As per the budgetary estimates, the government targets to bring down fiscal deficit to 4.6 percent of the gross domestic product for the fiscal ending Mar 31, 2012.

“At the current juncture when there is a need to boost private investment, the increase in fiscal deficit could potentially crowd out credit to the private sector. Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation,” the RBI said.

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