RBI Annual Report warns against oil price shocks

By agencies   |   Tuesday, 30 August 2005, 07:00 Hrs
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NEW DELHI: The RBI Annual Report 2004-05 is surprisingly optimistic about the growth prospects of the India economy despite the recent oil price shocks. However, it cautions that sustaining the growth momentum would depend largely upon policies concerning oil prices.

The Reserve Bank of India Annual Report 2004-05 has kept both 7 percent growth projection in GDP and annual inflation rate between 5-5.5 percent intact. The central bank has attributed this bullishness to the revival of the southwest monsoon, robust manufacturing activities, high corporate profitability, buoyant equity markets, strong merchandise exports and imports, sustained demand for non-food credit and a vibrant service sector.

Global factors like a oil prices at record high levels are likely to impinge on the country’s growth prospects particularly when India imports 70-80 percent of its oil requirements. But it appears that domestic factors still dominate the country’s economic scenario and hence are likely to counteract the pressure from overseas.

Oil prices have to be watched closely though and the central bank has cautioned that if the government fails to raise domestic fuel prices could increase the economy’s fiscal burden, its finances and stoke inflation which is presently just above 3 percent. High oil prices remained the most critical factor influencing domestic inflation and any complacency in managing price stability could hurt growth. RBI said high oil prices would expand the trade deficit and lead to a widening of the current account deficit in 2005-06.

The central bank’s comment came on a day when oil prices hit a record above $70 a barrel.

The country's current account balance has moved from a surplus of 1.7 percent of GDP in 2003-04 to a deficit of 0.9 percent in 2004-05, mainly due to a substantial rise in imports, particularly because of the meteoric rise in oil prices.

Oil imports at $29.8 billion have shot up by 45.1 percent in 2004-05, mainly on account of the surge in international crude oil prices in volume terms. However, in terms of growth rate, oil imports slowed to 5.5 percent in 2004-05 from 10.6 percent in 2003-04.

The inability of the government to pass on the rising international prices to the domestic consumer on account of political pressure has already caused losses for state oil refiners such as Indian Oil Corp., Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd.

A section in the government is putting pressure to cut taxes, which account for 35 to 57 percent of pump prices, to enable refiners and marketers to get better returns. But any tax cut would add to pressure on the government’s finances, with the fiscal deficit already high at about 4 percent of gross domestic product.

The report said the outlook remained highly uncertain with limited scope for enhanced supplies in the near future, taking into account of inventories, unutilized capacities and gestation period of new investments. There will be impact on prices, output, competitiveness and disposable incomes even though the rising prices have not yet triggered generalized inflationary pressures - a common feature in earlier oil shocks.

The Annual Report goes to the extent of saying that sustaining the growth momentum would depend largely upon policies concerning oil prices.

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