Business
Lower gold prices, stable rupee and proceeds from spectrum auction to help government achieve the budgeted fiscal deficit target of 4.1% for this fiscal
Updated : Mar 19, 2018, 05:30 AM IST
The government is well on path to achieve its budgeted fiscal deficit target of 4.1% or Rs 5.28 lakh crore of the gross domestic product for the current financial year even though it has achieved 75% of the target at Rs 3.97 lakh crore in August.
According to bankers and economists, lower global crude price, future incomes from spectrum auctions and divestments in government companies, softer gold prices and stable rupee will immensely help shrinking the deficit.
Falling crude price has come in favour of the ruling government which has now completely deregulated diesel prices. Import bill on crude is expected to come down to $33.5 billion in the July-September quarter from the previous quarter's $36.50 billion, said Dilip Bhat, joint managing director at Prabhudas Liladhar.
Besides, another Rs 42,000 crore is expected to flow into government coffers in February when it auctions spectrum in the 900 MHz and 1800 MHz bandwidths as per the suggested reserve prices, said Rajan Mathews, director-general of Cellular Operators' Association of India, said.
Most analysts said they have strong reasons to believe that divestments of government companies could raise around Rs 45,000 crore against the budgeted estimates of Rs 58,000-odd crore. But above all it's the crude and stable currency that is making them optimistic of the current year ending with lower fiscal deficit.
"If crude remains range-bound between $80 and $86 a barrel and the rupee remains within Rs 62 to the dollar the burden on the current account deficit will ease immensely," said a senior banker.
Even though the government recently deregulated diesel, the oil ministry is not clear on the mechanism of pass-through.
"We are not sure on the flexibility to pass on the entire price differential to retail consumers, or whether the private sector players could have an advantage in pricing over us," said a senior official at a government-owned oil marketing company. But the fact of the matter is that government-owned oil marketing companies (OMCs) are out of the red as far as retail petrol and diesel pricing are concerned.
"There is an over-recovery in petrol by Rs 3.20 a litre," said Bhat.
The government's recent move on diesel is seen having a direct positive impact on import bills, transportation costs; hence lower inflation besides higher profits for OMCs. The government therefore stands to reap rich dividends from its OMCs this fiscal, say industry watchers. There are, however, some apprehension about non-BJP governed states not passing on the benefit of the price slashed by OMCs to retail consumers and in fact could raise state levies to the extent of the price-cuts.
"One could see a repeat of 2002 when non-BJP ruled states like Maharashtra hiked state levies and offset the benefit of global oil price slide. The administrative price mechanism was then brought back in 2004," said a government official at an OMC.
"Diesel prices are now more aligned with global market trends, which implies that there will no more under-recoveries and hence no dependence on government for financing," said Anis Chakravorty, senior director at Deloitte.
But then there is a huge differential of about Rs 8 per litre between retail diesel prices in Delhi and Mumbai due to state levies, he said. In Mumbai diesel prices are higher at Rs 63 as against Delhi which they are around Rs 55.
According to bankers and economists, the falling trend in crude is big news on the macro economic front, but the risk now is only on the exchange rate where the rupee is showing signs of weakening. A weak rupee implies a higher exchange rate for the dollar or higher import bills. The rupee that had weakened to 61.94 a dollar on October 1 began gaining strength till October 9 when it hit 61.05, but then it's on a weakening mode and slipped to 61.28 on Wednesday.
International gold too has begun to show an upward momentum since October 6 when it was around $1,207/oz to $1,243 on Wednesday but the yellow metal is way below its August 8 peak of $1,309.58.
"There oil slide makes fighting inflation easier as fuel-driven inflation starts easing," said Chakravorty.
Inflation levels have hit new lows in September. The consumer price index was at its record low of 6.46% as against the previous month's 7.7%, while the wholesale price index was at a five-year low of 2.38% (3.74%).
Though the Reserve Bank of India has maintained the key repo rate at 8%, bankers say corporates are borrowing short-term funds at lower rates.
"It need not necessarily mean lower rates have to follow only if RBI brings down repo rate," said a senior banker at a government bank.
Corporates are already raising short-term funds at 25 bps below the recent levels, the banker said.
Yields on government bonds, commercial papers (CPs) and non-convertible debentures (NCDs) were trading lower in the secondary market. On Wednesday,10-year bond government yields were trading at 8.36% from the 8.5% levels traded ten days ago.
"The market yield on CPs and NCDs have already edged down. Lower trending inflation and strong demand from foreign investors have led to a drop of 15 to 25 bps in the last one month, reducing cost of borrowings for corporates," said K Harihar, treasury head at FirstRand Bank.
Meanwhile, the focus is on crude.
Brent crude last Wednesday edged up to $86.64 from the previous day's close of $86.22. Since June, the prices were down 25% due to ample supply and weak demand globally.
For the moment, most are expecting the trend to sustain on the oil price front globally but they are not optimistic on whether the government will pass through the benefits in full to retail fuels – petrol and diesel.