Mukherjee Signals Higher Oil Costs May Boost India Subsidy Bill

India’s Finance Minister Pranab Mukherjee said higher oil prices are a concern, underscoring the risk to the nation’s fuel subsidy bill and efforts to curb the budget deficit.

“Uncertainty in the oil price is a serious issue which we shall have to address,” Mukherjee, 75, said in an interview with Bloomberg UTV in New Delhi yesterday, two days after unveiling the budget for the fiscal year starting April 1. Adjustments to the subsidy bill remain “a conjecture at this point,” he said.

The surge in oil prices past $100 a barrel following unrest in the Middle East and Libya is putting pressure on central banks around to world to fight inflation while trying to sustain a recovery from the 2009 global recession. U.S. Federal Reserve Chairman Ben S. Bernanke said this week persistent increases in oil and commodity costs would be a “threat” to economic growth and price stability.

India meets about three-quarters of its annual energy needs from imports, and Mukherjee estimated a 38 percent drop in fuel subsidy costs next year to help lower government borrowing.

“Given what’s happened to global commodity prices, both food and now increasingly on oil, it is going to be difficult to hit those expenditure numbers,” Michael Buchanan, chief Asia- Pacific economist at Goldman Sachs Group Inc., said in New Delhi yesterday. “I am assuming oil prices will remain fairly high” compared with the average for the current fiscal year.

Yields Fall

The Bombay Stock Exchange’s Sensitive Index rose 3.5 percent on March 1, the most in 21 months, and bonds also advanced after Mukherjee’s Feb. 28 budget announcement. He plans to reduce the budget shortfall to 4.6 percent of gross domestic product in the 12 months through March 2012 from 5.1 percent in the current period.

The yield on the 8.13 percent bond due September 2022 fell one basis point to 8.08 percent in Mumbai. A basis point is 0.01 percentage point. India’s financial markets were closed yesterday on account of a Hindu festival.

“The concern is really on crude,” Kaushik Basu, chief economic adviser in the finance ministry, yesterday told a conference organized by the Institute of International Finance in New Delhi. If oil prices surge “there are simply two choices - either we allow our fiscal-deficit target to go, or we decide to pass on some of this additional price to the users,” he said.

Budget Deficit

Crude oil for April delivery climbed 72 cents, or 0.7 percent, to $100.35 a barrel at 11 a.m. yesterday on the New York Mercantile Exchange as Libyan rebels braced for renewed clashes with forces loyal to leader Muammar Qaddafi. Prices are up 26 percent from a year ago.

Fighting in Libya may have shut off as much as 850,000 to 1 million barrels a day of the North African country’s output, according to the International Energy Agency.

India may “struggle” to meet its budget-deficit goal for the next fiscal year as spending on food and fuel subsidies will probably rise, Standard & Poor’s Ratings Services said in a March 1 statement.

Mukherjee has provided an outlay of 236.4 billion rupees ($5.3 billion) for fuel subsidies in the next fiscal year, less than an estimated 383.86 billion rupees for the current fiscal year, according to the budget. The government plans debt sales of 4.17 trillion rupees beginning in April compared with a projected 4.47 trillion rupees of sales in the current fiscal year, budget documents showed.

Unexpected Expenditure

Mukherjee said the budget estimates have taken into account the potential for “unexpected expenditures” in areas including defense, though he added that oil prices are “uncertain.”

Mukherjee forecasts India’s GDP may grow as much as 9.25 percent in the year starting April 1, helping to boost tax revenue. He is also aiming to raise 400 billion rupees from the sale of stakes in state-run companies.

Proposed sales of shares in Indian Oil Corp., the country’s biggest refiner, and Steel Authority of India Ltd. (SAIL), its second- largest producer of the alloy, may help raise about 104 billion rupees next fiscal year, according to data compiled by Bloomberg.

Service Tax

The minister has included more services under the tax net to lift revenue. Taxes would now be collected from air- conditioned restaurants, hotels, airlines and hospitals.

“Underlying GDP growth momentum, minor modifications in excise and service tax, and the continuing strength in external trade should ensure that the government achieves its target,” Moody’s sovereign analyst Aninda Mitra said in an e-mail yesterday.

The view was echoed by Gerard Lyons, London-based chief economist at Standard Chartered Plc.

“Some of the points that have not been really touched upon is the potential for future privatization and the potential of the growth dividend to continue to bear out in future,” Lyons told the conference in New Delhi yesterday. “The headline fiscal number is not a concern for me.”

India’s spending plan may be strained by enhanced food subsidies, S&P said in its March 1 statement. A plan to link wages in the government’s rural jobs program to the consumer- price index will result in a doubling of the payments to workers, the rating company said.

S&P said India doesn’t have any “one-off” revenue to fall back on next year, such as the 677.2 billion rupees it raised from phone-license sales in the current year, almost double the budgeted amount.

“The extent to which the government can achieve its deficit targets depends on the pace of economic growth and the movement in global and domestic fuel, fertilizer and food prices,” according to the S&P statement.

To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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