Fuel price hike may cut fiscal deficit

The increase in the fuel prices will help oil marketing companies (OMCs) cut under-recoveries by Rs22,000 crore this year, thereby easing pressure on the government finances and bringing down the fiscal deficit.

"These changes will help the fiscal and the revenue deficits to decline," finance ministry's chief economic adviser Kaushik Basu said on Friday (June 25, 2010), after an empowered group of ministers led by the Finance Minister Pranab Mukherjee decided to free petrol prices and raise prices of kerosene, diesel and cooking gas.



The government has projected a fiscal deficit of 5.5% of the gross domestic product (GDP) in 2010-11. But finance secretary Ashok Chawla had earlier said it could shrink to 4.5% of GDP if fuel prices are deregulated and bonanza from 3G-spectrum auction is factored in.

The lower under-recoveries will also help the government to stick to its borrowing target of Rs345,000 crore for the fiscal.

If the government does not cut borrowing, then the extra funds could be used for meeting other needs. "The partial deregulation of fuel prices will help reduce the fiscal deficit by about 0.5%. But more importantly, it will help free up funds for expenditure in development areas," said NR Bhanumurthy, an economist at NIPFP.

Under-recoveries by OMCs were earlier pegged at Rs78,000 crore in 2010-11, but the government had only budgeted about Rs3,000 crore for petroleum subsidy. Finance secretary Ashok Chawla had said that the subsidy burden on the government would be higher than budgeted. A part of the losses would have been passed on to OMCs and oil companies.

"There may be some short-term pain, but it will result in long-term gain. The fuel price hike will help the government cut down the subsidy bill and control the deficit," said DK Joshi, chief economist at rating agency CRISIL.