Oil subsidy, rupee may push fiscal deficit above 5 percent

Widening oil subsidy and weakness in rupee are likely to push India's fiscal deficit above 5 percent in the current financial year as against the budgetary target of 4.8 percent, a ratings and research agency said.

India Ratings & Research, a unit of Fitch Group, said the recent depreciation in the value of rupee is likely to increase oil subsidy to 0.4 percent of the country's gross domestic product (GDP), 0.1 percent more than the budgetary target.

The increase in oil subsidy bill could alone push the fiscal deficit over 5 percent of GDP as against the budgeted 4.8 percent, it said.

"Unless the price of diesel is hiked steeply or those of the three controlled petro products are hiked moderately, the government's fiscal deficit is likely to cross 5 percent of GDP," Devendra Kumar Pant, chief economist and head of public finance at India Ratings & Research, said in a research note.

Pant said the rupee depreciation has resulted in a sharp increase in Indian crude basket price.

"Despite an Rs.0.5 per litre monthly hike in diesel prices, under recovery of three controlled fuels - diesel, liquefied petroleum gas and superior kerosene oil - is threatening the government's financial year 2013-14 fiscal arithmetic," Pant said.

In the union budget for the current financial year presented in February, Finance Minister P Chidambaram had made provisions of Rs.650 billion for oil subsidy and Rs.659 billion for fertiliser subsidy.

At the time of budget preparation, the rupee was trading in the range of 53-54 against a dollar.

The Indian currency has depreciated sharply since May. India Ratings & Research said such a sharp depreciation would substantially alter the budget's fiscal arithmetic.