Finmin, Plan panel divided on oil burnout

NEW DELHI: The government appears to have divergent views on the fallout of the high oil prices on the country’s economic growth. The Planning Commission has opted for a cautious view and has warned that high oil price may have an impact on the growth rate, even as the finance ministry maintains that rising oil price is unlikely to impact GDP.

“In a high oil price scenario, our growth rate could be lowered by between 0.5 and 1.0 percentage points below our normal potential,” the Planning Commission said in the draft approach paper of the Eleventh Five-Year Plan. According to its assessment, oil prices are expected to remain high and it will “exert contractionary pressure on the economy, both directly and also through their impact on world economic growth.”

The finance ministry, however, has a different view on the issue of the fuel price hike and its impact on GDP growth. Commenting on country’s revised annual estimates on May 31, ’06, finance minister P Chidambaram said that if oil prices rose and if it was reflected in the domestic prices, it would have an impact on inflation. “

Rise in oil prices world-wide need not affect growth rate,” he said. The revised annual estimates records 8.4% GDP growth in ’05-06, surpassing the advance estimate of 8.1%. The growth has been significantly high compared to previous year’s figure of 7.5%.

While the finance ministry’s views may hold some ground given the demand elasticity of the product, countries across the world are now coming around the view that it would impact GDP if global prices continue to be northward bound.

The Planning Commission, however, suggested that the adverse impact of high oil prices on GDP growth can be substantially moderated in the medium term by “appropriate oil pricing policies, increased exports and appropriate fiscal and monetary policies”. The approach paper suggests a long term solution: “

The only viable policy to deal with high international oil prices is to rationalise the tax burden on oil products over time, remove fat which may exist in existing pricing mechanisms that give the oil companies an excessive margin, realise efficiency gains through competition at the refinery gate and retail prices of petroleum products, and pass on the rest of the international oil price increase to consumers, while compensating targeted groups below the poverty line as much as possible.”

It suggested that the government reconsider the current method of determining prices for petroleum products on the basis of import parity. “India is deficient in crude oil but has developed surplus capacity in products. Product price entitlement should, therefore, be based on export parity pricing, which would be much lower than import parity,” it said. It also suggested that the duty cut be reduced on petroleum produced by 5% to equate it with the duty on crude. The 10% duty on products has already been reduced to 7.5% recently.