New Delhi: The Narendra Modi government is likely to miss its fiscal deficit target in its final year in office due to higher than budgeted oil prices and rising interest rate scenario, Moody’s Investor Service said on Wednesday. The government has set the target of reducing fiscal deficit to 3.3% of GDP in 2018-19 from 3.5% of GDP in the previous fiscal year.

“Higher-than-budgeted oil prices will add to short-term fiscal pressures, which points to a higher risk that the government’s deficit objective will not be met," Moody’s said in the report.

Moody’s said tightening global financing conditions which have manifested in higher Indian government bond yields, placing pressure on India’s already weak debt affordability and further limiting the government’s fiscal policy space. Government bond yields which were 6.7% in September 2017 have touched 7.9% as of August 2018.

While India’s deregulation of both diesel and petrol prices has reduced the fiscal impact of rising oil prices, liquefied petroleum gas (LPG) and kerosene remain regulated and subject to subsidies, which were budgeted at 0.5% of government expenditures for the year ending March 2019.

The data from Petroleum Planning and Analysis Cell (PPAC) reveals that while the volume of oil imports by India has increased by 5.6% in the first three months (April-June) of this fiscal, oil price for the Indian basket has increased 46% during the same period.

“Oil prices at current levels will raise expenditures and add to existing pressures on the fiscal position stemming from the lowering of goods and services tax (GST) rates on a range of consumer goods and a tax cut for small businesses as well as the relatively high minimum support prices (MSPs) set for this year," Moody’s said.

Although the government may cut back on capital expenditures to limit fiscal slippage, as has happened in previous years, Moody’s cautioned that such cuts may not fully offset the revenue losses and higher spending on energy subsidies and crops’ price support.

“We therefore see risks that the central government deficit will be wider than targeted. Moreover, pre-election spending means that a reversal in the widening of the states’ deficit seen in recent years is unlikely," it added.

Moody’s expects the general government deficit (central and states) to be around 6.3% of GDP in the fiscal year ending March 2019 compared to 6.5% of GDP the year before, with states remaining just under their deficit cap of 3.0% of GDP. However, Moody’s maintained that temporary fiscal slippage if any will not offset robust nominal GDP growth and large domestic financing base that will keep the government’s debt burden broadly stable.

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