Recent INR Fall Could Push FY14 Fiscal Deficit Over 5% of GDP - India Ratings

New Delhi, September 26, 2013: India Ratings & Research (Ind-Ra) says the recent INR depreciation could increase oil subsidy by 0.1% to 0.4% of GDP in FY14 and this alone could push the fiscal deficit over 5.0% of GDP as against the budgeted 4.8%.   
 
“INR depreciation has resulted in a sharp increase in Indian crude basket price in INR terms. Despite an INR0.5/litre monthly hike in diesel prices, under recovery of three controlled fuels - diesel, liquefied petroleum gas and superior kerosene oil - is threatening the government’s FY14 fiscal arithmetic. Therefore, unless the price of diesel is hiked steeply or those of the three controlled petro products are hiked moderately, the government’s fiscal deficit is likely to cross 5% of GDP,” said Dr. Devendra Kumar Pant, Chief Economist and Head - Public Finance at Ind-Ra.

In the FY14 budget, INR659bn and INR650bn were set aside for the fertiliser and oil subsidies, respectively. When these amounts were allocated, INR was fluctuating between 53-54/USD. A sharp INR depreciation since May 2013 has substantially altered the budget’s fiscal arithmetic.

India’s annual fertiliser consumption is around 53 million metric tonnes and over 30% of this is met by import. However, global fertiliser prices have declined in the range of 11.3% yoy (rock phosphate) to 23.9% yoy (urea) between April and August 2013. On the other hand, INR depreciated by 6.0% yoy during the same period. Therefore, based on the trend of global fertiliser prices, Ind-Ra does not expect any significant slippage in fertiliser subsidy on account of INR depreciation in FY14.

The picture with respect to oil, however, is different. The price of Indian crude basket between the first fortnight of September 2013 and the first fortnight of April 2013 increased by 28%. As a consequence, daily under recovery of oil marketing companies (OMCs) increased to INR4.61bn during the first fortnight of September 2013 from INR3.49bn during the first fortnight of April 2013. OMCs’ daily under recoveries of diesel alone shot up to INR14.5/litre on 16 September 2013.

Although INR has appreciated between end-August and mid-September 2013, it is unlikely that it will appreciate to the level witnessed when the FY14 budget was prepared. Ind-Ra expects INR to appreciate to 59-61/USD by end-FY14. In all likelihood, oil subsidy in FY14 will be higher than the budgeted amount of FY14.

“OMCs’ under recovery will increase by INR1.50bn every day if Indian crude basket price rises by INR1,000/bbl. This would translate into an increase of around INR340bn in the government’s oil subsidy burden,” said Dr. Sunil Kumar Sinha, Director - Public Finance at Ind-Ra.   

Assuming the monthly INR0.5/litre hike in diesel prices will continue, Ind-Ra has analysed five oil subsidy scenarios using a mix of INR/USD level, the cost of Indian crude basket and the likely hike in RSP of the three controlled fuels.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research - A Fitch Group Company)