Fuel price hike unlikely to narrow fiscal gap significantly

India's fiscal deficit may not narrow significantly this financial year despite the government taking "bold" steps on subsidies, feel economists.

Yesterday, the government announced 12% increase in diesel prices and capped subsidised cooking gas cylinders to six a year. RBI will release its mid-quarter review of monetary policy on Monday.

"Reduction in fiscal deficit from the (diesel price) hike is unlikely to be significant. While the moves may be seen as reformist measures to tame fiscal deficit, we believe the effective gains will be marginal...For 2012-13, we continue to maintain fiscal deficit of over 6% of GDP (gross domestic product)," Dhananjay Sinha, economist and strategist with Emkay Global Financial Services, said.

Economists said while there will be a notional gain of Rs 12,000 crore by way of lowering of oil subsidy burden, there will be cash loss of Rs 5,550 crore due to reduction in excise duty on petrol in the second half of this financial year.

In addition, the increase in fuel cost will have a secondary impact of rising procurement cost for the government. "The government will still have to bear the additional Rs 45,000 crore oil subsidy on top of the Rs 43,600 crore allocated in 2012-13 budget," Sinha said.

His views were echoed by other economists also.

"We continue to expect the centre's fiscal deficit, at 5.7% of GDP in 2012-13, will overshoot the budget's 5.1% target. This will primarily emanate from a higher than budgeted oil subsidy, even after factoring in the 12% diesel price hike and capping subsidised cooking gas cylinders," Bank of America Merrill Lynch's India economist Indranil Sen Gupta said.

"It may not amount to any significant correction on our fiscal deficit estimates," noted Indranil Pan, chief economist at Kotak Mahindra Bank.