The present oil pricing system in India, though effective in the short run, would fail to control inflation in the long run, NCAER said in its study of macroeconomic impact of high oil prices, commissioned by Petrofed.
It said such a strategy would increase fiscal burden as by not allowing oil companies to increase domestic oil prices in line with spurt in international prices, it would divert resources from productive activities to providing subsidies.
The government was not allowed to pass Rs 8.29 per litre hike in diesel prices needed to be in line with rise in cost, Rs 6.71 per litre in petrol, Rs 17 per litre in kerosene and Rs 130 per cylinder in LPG and instead it decided to compensate oil firms through a mix of bonds and discounts from upstream firms.
Revenue deficit is very sensitive to the external sector deficit. Increase of external sector deficit due to higher oil price would produce negative repercussion on the fiscal position of the government. Sooner or later, the government would bear the extra burden in the external sector, it said.
Increase in fiscal burden poses significant problems in the long run as it puts immense pressure on future domestic prices as well as output and erodes the competitiveness of the exports.
The domestic economy is bound to suffer if the government restricts the passing through of world price increase reaching the domestic prices and manages the impact through measures that are not sustainable in a fiscal sense,the thinktank warned.