The alarming rise in global crude oil price is increasingly emerging as a matter of concern for oil importing developing countries like India. The  international oil price -- now moving towards $ 100 per barrel -- is posing a serious challenge to the Indian economy, which is now witnessing a robust growth momentum.

If the policy makers do not take necessary measures backed by economic rationale the overall economy may head for trouble. The worst sufferers now are the state owned Oil Marketing Companies (OMCs) as they are not being allowed to raise retail prices of four mass consuming petroleum products—petrol, diesel, cooking gas and kerosene—in tune with the rise in global prices.

The UPA government is apparently not inclined to allow any hike in retail prices of petroleum products. The government, faced with the daunting task of reining in inflation, is not willing to make any upward revision in auto fuel prices as such a step will have a cascading effect on the economy.

Only last month the government, while making no change in retail prices, devised a package to take care of two-thirds of the Rs 55,000 crore revenue loss being incurred by the public sector oil firms. This package was evolved on the basis of the Indian basket of crude oil prevailing at $ 70  per barrel.

But with global crude prices crossing $ 96 a barrel the compensation is now being considered inadequate. As per an estimate state-owned OMCs might incur a revenue loss of Rs 70,000 crore if global crude oil prices were to remain above $ 90 for the rest of the fiscal 2007-08.

The government’s approach so far to tackle as sensitive an issue as pricing of petroleum products has been primarily guided by political considerations rather than by sound economic rationale. Any pricing mechanism of petroleum products must keep two crucial factors in mind.

One: India meets 75 per cent of its oil requirements through import. Second: India’s oil consumption is going to increase manifold with the economy moving in a high trajectory of growth. While there is a genuine need to protect the vulnerable sections of society from volatility of global crude oil prices, the principle of fiscal prudence must also guide the overall pricing strategy of petroleum products.

Up to a point government can either issue oil bonds or tinker with the  duty structure. In the overall interest of the economy the government should not shy away from putting some burden on the consumers.