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Deficit will overshoot budget target despite fuel hike: experts

India's fiscal deficit is likely to overshoot the budget target of 5.1% of GDP, even after factoring in the much awaited diesel price hike, experts say.

business Updated: Sep 16, 2012 15:27 IST

India's fiscal deficit is likely to overshoot the budget target of 5.1% of GDP, even after factoring in the much awaited diesel price hike, experts say.

The country's fiscal deficit is likely to exceed budget's 5.1% target primarily because of higher than expected oil subsidy, even after factoring in Rs 5.63 a litre hike in diesel prices and capping the supply of subsidised LPG to 6 cylinders per household in a year.

According to HSBC chief economist for India and Asean (region) Leif Lybecker Eskesen, "the steps will only contain and not prevent fiscal slippage".

Even factoring the fuel hikes in, HSBC expects the 2012-13 fiscal deficit to reach 5.8% (as against the 5.1% deficit target).

While the price hike is positive and will reduce the under-recoveries (losses by oil companies) by Rs. 20,300 crore, key to note is that retail prices are way below global prices, Citigroup said in a research report.

If there is no change in the current subsidy sharing mechanism, the government's share of losses would touch Rs. 1,00,200 crore -– higher than Rs. 83,500 crore in FY12, it said.

"Accounting for other expenditure and revenue slippages, we maintain our view of the fiscal deficit coming in at 5.9% of GDP as against the government's target of 5.1%," Citigroup economist Rohini Malkani said in a report.

Bank of America Merrill Lynch India economist Indranil Sen Gupta said in a report that "India's fiscal risks are overdone, although the fiscal deficit is the favourite whipping boy for every economic ill - low growth, high inflation, rupee depreciation - today.

"Yet, we do not expect India's fiscal position to improve in the visible future," he said.

It should, however, be noted that the fiscal situation has worsened not only in India but across the BRICs since the Lehman crisis of mid-2008, he said in the report.

However, fiscal deterioration is cyclical rather than structural.

In early, 2000, the high fiscal deficit in India did not prevent recovery and the situation itself came off as growth revived and this time also it will follow the same path, the BofA-ML report said.