India FY12 fiscal deficit target looks questionable - S&P

MUMBAI Mon Feb 28, 2011 7:21pm IST

An employee counts currency notes at a cash counter inside a bank in Mumbai June 21, 2010. REUTERS/Rupak de Chowdhuri/Files

An employee counts currency notes at a cash counter inside a bank in Mumbai June 21, 2010.

Credit: Reuters/Rupak de Chowdhuri/Files

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MUMBAI (Reuters) - India's fiscal deficit target of 4.6 percent of GDP for 2011/12 may be bit difficult to attain given upside risks to oil subsidy and wage bill under the social employment programmes, said Takahira Ogawa, director of sovereign & international public finance ratings at Standard & Poor's.

"India's inflation could be potentially dangerous and make the government's fiscal position vulnerable against global commodity prices," said Ogawa.

"Achieving the 4.6 percent fiscal deficit target could be questionable given the sharply lower fuel subsidy which could rise with oil prices rising and the sharp increase in wages under the National Rural Employment Guarantee scheme," he added.

The government in its budget for 2011/12 proposed a petroleum subsidy of 236.4 billion rupees and revised the same for 2010/11 at 384 billion rupees.

The leading global rating agency will review India's sovereign ratings based on its fiscal consolidation target acheivement at end of March 2012.

"Fiscal deficit is the single most negative factor for sovereign rating in India and we will monitor if the government overruns its target end of 2011/12 when we look up the sovereign rating on India," Ogawa said.

In 2010/11 the government expects its fiscal deficit to be at 5.1 percent compared with its earlier budget estimate of 5.5 percent thanks to windfall gains from telecom spectrum auction.

India's inflation has remained sticky mostly due to high food prices and has been also reflecting on the headline inflation number.

Indian food inflation is among the highest in Asia despite good harvests and food prices have been in double digits for much of the last year, sparking street protests and keeping pressure on the government.

The food price index rose 11.49 percent and the fuel price index climbed 12.14 percent in the year to Feb. 12, government data on Thursday showed.

The wholesale price index , the most widely watched gauge of prices in India, rose 8.23 percent in January from a year earlier, compared with 8.43 percent in December.

"Substantial part of food inflation is structural due to growing income levels, more consumption, which could push up price level. The government has to take responsibility in dealing with inflationary pressures, and perhaps take measures to increase supply side factors," Ogawa said.

Food inflation in India is largely driven by supply side pressures and the central bank is not responsible for that, Reserve Bank of India governor Duvvuri Subbarao said on Saturday.

(Reporting by Suvashree Dey Choudhury; editing by Sunil Nair)

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