Amy Yee and Joe Leahy
FT Syndication Service
NEW DELHI : Indian officials do not take kindly to expressions such as "fiscal blowout" when they are used to describe the government's finances.
"These are all alarmist phrases," said Palaniappan Chidambaram, finance minister, in a recent interview with the Financial Times. "Our macro-economic fundamentals are strong."
But with the sudden rise in global oil prices to highs of more than $130 a barrel, many economists warn that India's fiscal situation is heading firmly in the wrong direction.
India's state-owned petrol pump operators sell fuel to consumers at a subsidised rate averaging about $48 per barrel. At last week's oil price of about $123, this amounts to a 61 per cent discount - fantastic for consumers but a disaster in the making for the government.
The state-run petrol pump operators - the private ones are all but bankrupt because they cannot compete with subsidised fuel - estimate they will lose about $57bn more than 3.0 per cent of gross domestic product, this financial year from the subsidies.
To plug this hole the government has lately announced increases of 8.0-17 per cent in the prices of petrol, diesel and liquid petroleum gas but left kerosene, the most important fuel for the poor, unchanged.
The increases will cover only about $5.0bn of the fuel subsidy deficit, with the remainder to be shouldered by the government. But officials worry that even this marginal rise could aggravate inflation, which has hit a three-and-a-half year high of 8.1 per cent.
Rajeev Malik, economist with JP Morgan in Singapore, estimates the fuel price rise could increase inflation by as much as 1.0 per cent - an unwelcome outcome for a government facing elections in less than 12 months.
The growing burden of the fuel subsidies together with a farmers' debt waiver scheme, a civil service salary increase, fertiliser subsidies and state debts mean India's consolidated fiscal deficit could reach 7.0-10 per cent this year against 5.7 per cent a year earlier, economists estimate.
The government blames unavoidable external factors for the problem. But critics argue it could have started increasing fuel prices two years ago, when economic conditions were benign.
Others say the government should have learned from some Indian private sector operators, which are quick to adapt to global economic factors.
Economists say that, despite the government's lack of preparedness for the oil price rise, the fiscal situation remains manageable.
Tushar Poddar, economist at Goldman Sachs, predicts the economy will expand at a still robust 7.8 per cent this year. The problems for the government will only start in earnest if the economy slows further.
Ultimately, however, it is not the opinions of economists but of people such as Rajinder Prasad that will matter most to India's Congress party-led ruling coalition. He drives his motorbike 60km-80km a day to his gardening jobs.
