Sharp rise in oil, fertiliser subsidies to hit fiscal health

RBI's macroeconomic and monetary development report

The Reserve Bank of India (RBI) on Monday said a sharp rise in subsidies for petroleum products and fertilisers threaten to hit the central government's efforts to improve fiscal health in FY12.

The improvement in deficit indicators seen in 2010-11 augurs well for growth rebalancing. But subsidies are likely to overshoot budget estimates, RBI said in its report, a day ahead of its first quarter review of the annual policy 2011-12.

While the internal fiscal situation may increase worries, a better external sector may bring some relief for the overall economy in the current financial year. The current account deficit (CAD) is expected to remain manageable in 2011-12. A pick-up in foreign direct investment (FDI) also augurs well.

RBI said, the export momentum and strong invisible receipts, led by software exports, are expected to keep CAD in better conditions. Exports have continued to grow, aided by diversification in its composition.

Turning to improvement in conditions on the fiscal front in FY11, it said preliminary indications are that the combined fiscal deficit of the Centre and states had narrowed to 7.7 per cent of the Gross Domestic Product (GDP). The combined revenue deficit had also fallen significantly.

Yet, the worries from huge spending (in form of subsidies) for the oil sector remain, RBI said. In spite of the administered price rises in June, the total fiscal slippage for the Centre from the oil sector may still be around one per cent of the GDP.

The government's budgetary stance of expenditure-driven fiscal correction for 2011-12 was viewed as a move towards fiscal consolidation and anchoring inflation expectations.