With an eye on the adverse fallout of rising oil prices, the Reserve Bank of India (RBI) on Monday said the government's subsidy bill for petroleum products and fertilisers might cross the projections for 2011-12 and put fiscal consolidation plans under strain.
As a step to stay on course of deficit reduction, RBI favoured an increase in domestic prices of petroleum products and fertilisers to contain higher provisions of subsidies.
Though revenue buoyancy was witnessed in 2010-11, there are risks to the deficit projections of 2011-12.
The subsidies were likely to exceed the budgetary provisions, given sharply higher international commodity prices, RBI said in its report on macroeconomic and monetary developments.
The process of fiscal consolidation should be taken forward on both revenue and expenditures sides. A sharp focus is necessary to quality of expenditure.
Referring to robust demand conditions, it said corporate sales growth remained robust during the third quarter of 2010-11 and together with inventory movements signalled continued buoyancy in demand.
However, profit margins came under pressure, on account of higher input and interest costs.
All components of input costs such as expenses on raw materials, power and fuel, and staff costs witnessed a significant increase.
The interest payment burden on firms and corporate has risen in sync with the tightening of monetary policy rates.
Companies accumulated stocks as reflected in the rise in stock-in-trade to sales ratio. This may at the current juncture of cycle indicate that producers anticipate a pick-up in demand.
Early results for the January-March quarter from a small sample of companies suggest that sales accelerated during the quarter, RBI added.
CAD pegged at 2.5%
The current account deficit (CAD) for 2010-11 is expected to settle at 2.5 per cent of gross domestic product, with a strong recovery in exports in the second half, according to the RBI.
It was 3.7 per cent in the first half, but moderated to 2.1 per cent in the third quarter, primarily reflecting a pickup in exports.
The growth trend continued in the fourth quarter. RBI, however, sounded a note of caution, saying the downward drift could reverse, if the current spurt in global crude oil prices persists.
With a larger CAD, any abrupt tightening of external financing could put pressure on the exchange rate.
It could also raise cost of capital and feed through into inflation.
