This Diwali, oil is not only burning the lamp at home but also a few holes in the government budget.
In its economic review released on Monday, the Reserve Bank of India said the central government would find it difficult to achieve the budgeted fiscal deficit for 2011-12. Bond markets have already been rattled after the government announced its intention to borrow an additional Rs 53,000 crore in the second half of FY12, thanks to a shortfall in small savings.
Growing fuel subsidies is an important part of the fiscal problem. The RBI report says expenditure on petroleum subsidies could range between 0.74% and 0.87% of gross domestic product (GDP), which overshoots the budget estimates of 0.26% of GDP for FY12. This includes compensation to oil marketing companies (OMC) for under-recoveries, which registered y-o-y growth of 42% during the period. The under-recoveries reported by OMCs for the first half of 2011-12 stood at staggering Rs 64,900 crore.
Global oil prices have weakened in recent weeks thanks to fears of slowing growth across the world, though the fall in the value of the rupee has ensured that India has not benefited from it as yet.
The worries are more long term. Global oil production has peaked, while strong growth in India and China in the coming decades could push up prices. The US Energy Information Agency predicts that the two Asian giants might account for nearly a third of world energy use by 2035.
Pricing energy is always going to be a politically difficult issue. However, higher fuel prices will work as an incentive for consumers and companies to use a scarce resource more carefully. Meanwhile, the immediate risk is that the government budget will continue to be in trouble thanks to fuel subsidies, especially at a time when there is a crying need for more spending on core needs such as primary education and public health.