Others may call the Union government's fiscal deficit targets unrealistic, but the finance ministry says it would keep this at 4.6 per cent of GDP during 2011-12, as projected in the Budget, even if global prices of crude oil stay at elevated for longer.
The Budget has provided around Rs 20,000 crore (Rs 200 billion) for compensating the public sector oil marketing companies - Indian Oil, Bharat Petroleum and Hindustan Petroleum - for 2011-12, but a substantial portion of this may go into just meeting losses incurred this financial year.
Global crude prices spiked after a political crisis engulfed first Egypt, then Libya, but have softened a bit after the earthquake in Japan.
By Friday afternoon on London's Intercontinental Exchange, Brent North Sea crude for delivery in April had dropped to $113.50 a barrel from $115.77 a week before.
On the New York Mercantile Exchange, West Texas Intermediate or light sweet crude for April slumped to $99.86 a barrel from $103.45 in the previous week.
But analysts believe the prices will spike again after recovery in Japan gathers momentum.
When asked, Kaushik Basu, chief economic advisor in the finance ministry, said, "All I can say is, we are very serious about fiscal consolidation, and intend holding on to our fiscal targets, even if the crude price rises on a sustained basis."
Basu admitted that if crude rose further, and sustains there for some longish time, say two months, then this would create fiscal strain.
"But crude is not the only item in the whole fiscal landscape. We can cut back on other expenditure and think of newer avenues of revenue generation. There are many areas where subsidies go in and if the need arises we may have to look at rationalising them, because fiscal consolidation and inflation control is one our central aims."
However, he wouldn't specify those newer areas of revenue generation and how subsidies could be rationalised in other areas.
He said when international prices begin to rise, there is not much the government can do about that.
"It is like a natural calamity. There isn't much we can do to stop it. We can only take protective measures; that is all. Crude, despite some recent respite, has been rising."
Basu said there were two ways of handling this. One, try to protect consumers by holding on to low domestic prices, but in that case, the government will have to subsidise consumers, and so the fiscal deficit will go up, creating long-run inflationary pressure.
Two, allow prices to rise and let consumers take the hit. "That will cause an immediate upward pressure on prices, though in the long run that creates less inflation. I know this does not sound rosy but that is exactly what I mean."
In that scenario, would the government decontrol diesel's price? Basu said, "No final decision has been taken. We have simply taken an in-principle decision to decontrol diesel prices in the future but no time line has been worked out.
When we do decontrol, there is likely to be an immediate upward impact on prices. With inflation persisting, government is understandably hesitant on this."
Revenue juggle
The Government has aimed to bring down the fiscal deficit to 4.6 per cent of GDP during 2011-12, even lower than the 13th Finance Commission's target of 4.8 per cent.
In the financial year which is concluding this month, the government has said it would rein in the fiscal deficit at 5.1 per cent of GDP, against 5.5 per cent pegged in the Budget estimate.
When asked why the government was not bringing it down further this financial year, despite an extra Rs 70,000 crore (Rs 700 billion) from spectrum sale and higher nominal GDP numbers, finance secretary Sushma Nath said, "We are not squandering away all the money we have got. We are using it for consolidation."
"Having the advantage of extra money, you could use it to reduce your liabilities. For example, on subsidies, we used to have a higher rollover. We are planning to reduce that liability because this year we have space.
There is no point in going down to 4.8 per cent and spend that money next year when we can spend it this year. We are frontloading it," she explained.
Citi Group economist Rohini Malkani said the budget has surprised positively on most counts, but disappointed on the arithmetic.
She pegged the fiscal deficit for 2011-12 at 5.3 per cent of GDP, against the Budget estimate of 4.6 per cent.
Her estimates are based on the assumptions that diesel deregulation doesn't happen and the Food Security Bill is implemented.
In reply to a debate on the General Budget in the Lok Sabha, finance minister Pranab Mukherjee had said, "Now, another doubt has been raised about fiscal deficit. I am oblique and sometimes not so oblique. A suggestion has been made that perhaps I have fudged the figures.
I have taken into account the prevailing situation. I do not know what would happen tomorrow. When we formulate the Budget, we consider the situation at that point of time and what we can foresee is going to happen."
He had earlier said, 'Let there be no doubt that fiscal deficit will be reined in at the level projected in the Budget estimates."
