Deficit goal viable with oil pass-through - RBI’s Gokarn

Friday, 4 March 2011 00:00 -     - {{hitsCtrl.values.hits}}

(Reuters) - The deficit cutting target, criticised by many economists as unrealistic, is viable if New Delhi is willing to pass along higher crude oil prices to consumers, the Reserve Bank of India (RBI) deputy governor said.

On Monday, the Finance Minister Pranab Mukherjee unveiled a budget for the year starting April 1 that targets a decrease in the fiscal deficit to 4.6 percent of GDP, from an expected 5.1 percent in the current year, a goal many economists have said underestimates the government’s energy subsidy burden in the face of high global crude prices.

“I think the judgement about subsidies indicated that, if you are committed to lower subsidies, the implication is that if crude prices go up you are willing to pass it on,” RBI’s Deputy Governor Subir Gokarn told reporters.

“Given those assumptions, the budget numbers (on the fiscal deficit) are realistic, because they have pegged the subsidies at whatever limit they have,” Gokarn said on the sidelines of an Institute of International Finance meeting.

India is in a difficult spot over high energy prices.

It exposed the price of petrol to market forces last year but still subsidises the much more widely used diesel, as well as cooking fuels, helping keep a lid on inflation and pleasing voters but adding to the subsidy burden and fiscal deficit. On Tuesday, a senior government official told Reuters that the budget’s deficit target was achievable even if crude stays at $100 for the full fiscal year. Brent crude prices rose on Wednesday from the previous session’s market close to around $115 per barrel -- the highest finish in 2-½ years on worries over whether unrest in Libya will spread to other oil producing countries in the Middle East.

Gokarn said high energy prices will put pressure on the central bank’s inflation management strategy.

He also said steps in the budget to bolster the output of protein sources including lentils and milk would help to manage supply side inflation in food. “We need concentrated coordination of different activities to get productivity up, and I think with this kind of focus, we should get the returns quite quickly,” he said.

The RBI has raised interest rates seven times since last March, but inflation remains naggingly high at more than 8 percent, driven in part by surging food inflation that is largely beyond the scope of monetary policy.