Fiscal deficit projections seem too ambitious: BNP Paribas

The Government may find it difficult to bring down its fiscal deficit to 4.6 per cent of the GDP in FY2011-12 due to rising oil prices.

With international oil prices hovering at over $100 a barrel and with the Government footing a large part of the country's oil bill through subsidies, a more realistic target for fiscal deficit would be closer to 5.5 per cent, said Ms Thio Chin Loo, Senior Forex and Interest Rate Strategist, Asia, BNP Paribas.

Speaking to Business Line, Ms Chin Loo said the Indian Government's fuel subsidy bill, which is estimated to be around Rs 26,000 crore in the Union Budget 2011-12, seems a little conservative because this estimate accounts for oil price at $80 a barrel.

“But if oil prices rise by another $30 a barrel, which is our forecast, then the fuel subsidy could increase to about Rs 550 billion (Rs 55,000 crore). If that is the case, then the fiscal deficit target would be affected,” she said.

Sovereign ratings

Higher fiscal deficit could impact the country's sovereign ratings as it is a key parameter that rating agencies consider, she pointed out. India also needs to watch its current account deficit situation very carefully, as it is running a very large current account deficit, about 3.3 per cent of GDP.

If current account deficit and portfolio flows are negative (as has been the case in the calendar year so far), then that would weigh on the rupee, Ms Chin Loo pointed out.

“If the rupee stays weak and oil costs rise, then import costs would rise and the current account deficit could deteriorate further. India already relies quite a bit on foreign financing of its deficit, in the form of foreign flows into equities.

If current account deficit and portfolio flows are negative then obviously that would weigh on the Indian rupee,” she said.

Given the issues such as high oil price and the effect it would have on current account balance and inflation, in the short term, at least this year, the rupee is likely to remain in the 45-46 range against the dollar.

Rupee movement

But in two years' time, the rupee could appreciate towards 44, given that a lot of investors still believe in India's long-term growth story, Ms Chin Loo said.

“On the foreign direct investment front, the Government is introducing a lot of relaxations.

“That should be positive for India. The variable is the current account and the oil price, which is difficult to predict over the medium term. But all things considered, this could lead to a modest appreciation of the Indian rupee within next one to two years,” she said.