High crude prices to put pressure on fiscal deficit

Mumbai: The Reserve Bank on Thursday warned high crude prices in global market could inflate the petroleum and fertiliser subsidy bill and put pressure on fiscal deficit which the government plans to bring down to 4.6 per cent in the next fiscal.

“While the budgeted level of fiscal deficit for 2011-12 gives some comfort on the demand front, a potential increase in the subsidies on petroleum products and fertilisers as a result of high crude prices could put pressure on expenditure,” RBI said in its mid-quarter monetary policy.

It is critical, therefore, to focus on the quality of expenditure, without compromising on delivery of services, the apex bank said.

“Only by doing this can the fiscal situation contribute to demand-side inflation management,” it added.

The government has pegged the fiscal deficit for the next fiscal at 4.6 per cent, which works out to be Rs 4,12,817 crore. For the current fiscal, it is pegged at 5.1 per cent of the GDP.

Political unrest in Egypt and Libya followed by protests in Middle East countries has led to a spike in international crude price, which at present is hovering around $100 a barrel. High oil prices could lead to greater subsidies to reduce burden on the common man.

The Reserve Bank further said it had expressed concern about the widening of the current account deficit (CAD) and the nature of its financing in its Third Quarter Review.

However, going by the recent robust export performance, CAD for 2010—11 is now estimated to come lower than earlier expected, at around 2.5 per cent of GDP, it added.

The RBI further said there should be greater emphasis on attracting long-term inflows components, including foreign direct investment (FDI).

“While CAD for this year has been financed comfortably, it is necessary to focus on quality of capital inflows with greater emphasis on attracting long-term components, including foreign direct investment (FDI)… to enhance sustainability of balance of payments over the medium-term,” it added.