In spite of targeting a 120-basis-point reduction in the Centre’s deficit for 2010-11 to 5.5 per cent of the gross domestic product (GDP), Finance Minister Pranab Mukherjee’s Budget in February was notable for one rather optimistic assumption: that the oil subsidy during the current year would be no more than Rs 3,000 crore. Just a month-and-a-half into the fiscal year, the issue has become rather more pressing, although the unexpectedly ambitious bids in the 3G auctions are likely to create an impression that the government’s fiscal worries are over, since the extra take on this account alone could be Rs 35,000 crore, or half a percentage point of GDP. However, the negative side more than outweighs this one-time gift, because oil prices have stayed high, and this will come to haunt the Budget’s price assumptions. The under-recoveries for the oil marketing companies (the gap between their refining and marketing cost and the government-fixed prices of petroleum products) in the current financial year are estimated at Rs 98,000 crore, on the assumption of an average international crude oil price of $80 a barrel, which is where the market has been in the last couple of weeks, after piercing the $90 level a month ago. Already, projections of a $100-a-barrel oil price are doing the rounds.
The government, meanwhile, has not initiated any move to implement the Kirit Parikh Committee’s recommendations to link domestic petroleum product prices to the international market. The Budget had announced that a decision on the recommendations would be taken in due course, which does not mean much, and in the current inflationary context, no one expects any price increase to be announced. The problem is that the Budget has made a provision of only Rs 3,000 crore for payment of subsidies on kerosene and liquefied petroleum gas during the year. The oil marketing companies’ finances are already under strain on account of carrying a large part of the subsidy burden for several years now; indeed, enormous value has been destroyed in the process because these companies’ stock prices have crashed as a result. Since the government is clearly disinclined to push through a petroleum product price increase, the net effect of the higher oil prices could well be that the deficit at the end of the year is a full percentage point higher than budgeted — after taking credit for the 3G windfall. In other words, 6.5 per cent, and not 5.5 per cent, with consequently higher deficits in subsequent years. Unless oil prices turn back down quite sharply, the deficit targets of 4.8 per cent and 4.1 per cent for next year and the year after, respectively, could prove unrealisable, especially since there will be no 3G bonanza in those years.
