Govt may miss fiscal deficit target on rupee fall: India Ratings

A sharp rupee depreciation since May 2013 has substantially altered budget's fiscal arithmetic

India Ratings & Research on Thursday said the sharp slide in the rupee against the dollar would raise the government’s oil subsidiary bill and increase its fiscal deficit to more than five per cent of gross domestic product, against the government’s target of 4.8 per cent.

“The rupee’s depreciation has resulted in a sharp increase in the Indian crude oil basket price, in rupee terms. Despite a 50 paise/litre monthly rise in diesel prices, the underrecovery of three controlled fuels — diesel, liquefied petroleum gas and superior kerosene oil — is threatening the government’s FY14 fiscal arithmetic,” said Devendra Kumar Pant, chief economist of India Ratings. Therefore, unless the price of diesel was raised steeply or those of the three controlled petro products were increased moderately, the government’s fiscal deficit was likely to exceed five per cent of GDP, he added.

The government has set aside subsidies of Rs 65,900 crore for fertilisers and Rs 65,000 crore for oil. When these amounts were allocated, the rupee stood at 53-54/dollar. A sharp depreciation in the currency since May this year has substantially altered the budget’s fiscal arithmetic.

India’s annual fertiliser consumption is about 53 million tonnes and about 30 per cent of this is met through imports. Global fertiliser prices have declined between 11.3 per cent (rock phosphate) and 23.9 per cent (urea) annually between April and August 2013. During the same period, the rupee depreciated six per cent. Therefore, India Ratings doesn’t expect any significant slippage in fertiliser subsidy this financial year on account of the currency’s decline.

On the oil front, however, the picture is different. The price of oil (Indian crude oil basket) rose 28 per cent between the first half of April and the first half of September. As a result, daily underrecoveries of oil marketing companies (OMCs) rose to Rs 461 crore from Rs 349 crore during the same period. OMCs’ daily underrecoveries of diesel shot up to Rs 14.5 a litre as on September 16.

Though the rupee appreciated between August-end and mid-September, it is unlikely it would appreciate to the levels when the Budget 2013-14 was announced. India Ratings said the rupee might rise to 59-61/dollar by the end of this financial year. Therefore, it is likely this financial year, oil subsidy would exceed the budgeted amount.

“OMCs’ underrecoveries will increase by Rs 150 crore every day if the Indian crude oil basket price rises by Rs 1,000/barrel. This would translate into an increase of around Rs 34,000 crore in the government’s oil subsidy burden,” said Sunil Kumar Sinha, director (public finance), India Ratings.