RBI: Difficult to deliver on 4.6% fiscal deficit target

Reserve Bank of India Governor Duvvuri Subbarao on Thursday said India would find it difficult to achieve its fiscal deficit target this year, unless it made adjustments to account for the rise in fuel and fertiliser prices. The comments sparked market concern that the government would need to step up borrowing to fund the gap.

Duvvuri Subbarao In Budget 2011-12, the government had announced a fiscal deficit target of 4.6 per cent of the gross domestic product. This was widely considered to be ambitious, after its 5.1 per cent deficit target for last year was met by high one-time revenues.


“Since crude fertiliser prices have gone up since the Budget announcements, unless some adjustment is made, either on the expenditure side or the tax side, it is difficult to deliver on a 4.6 per cent target,” Subbarao said, after RBI's board meeting here. “It is difficult to say whether the government can deliver on a 4.6 per cent target. It depends on what decision they take and a number of issues --- the adjustment of fuel prices being the most important one,” he said, adding fighting inflation remained the central bank's priority.

The government had said it would borrow a gross Rs 4.17 lakh crore in the current financial year, of which it would raise Rs 2.5 lakh crore in the first half.

Subbarao's comments, which came after the markets closed, raised concerns among bond dealers that the government would increase its borrowing in the second half of the current financial year. “The governor's remarks on fiscal deficit raise doubts that borrowings in the second half of the current financial year could be increased. However, there should not be any impact on markets now, since the concern for the market is immediate supply. We will cross the bridge, as and when it comes,” said Manish Wadhawan, director and head (rates), HSBC India.

Last June, the government had allowed state-run oil firms to fix the price of petrol, but had continued to control the prices of diesel, kerosene and cooking gas to shield the poor and try to tame inflation. State-run oil firms increased petrol prices by about 8.6 per cent from Sunday, a record rise, that is expected to fuel inflation in the country.

RBI had, on May 3, raised interest rates for the ninth time since March 2010, by a sharper-than-expected 50 basis points. It had also said fighting inflation was its priority, even at the expense of some short-term growth. “This is our priority and I only want to reiterate what we said in the annual policy — that we need to bring inflation down to an acceptable level for growth to be sustainable,” Subbarao said.

The wholesale price index has remained stubbornly high for months and rose 8.66 per cent annually in April. The prospect of higher energy prices would exert pressure on RBI to raise interest rates in June and maintain a hawkish stance. RBI expects inflation to stay high in the first half of the current financial year before easing to six per cent by the end of the year.