While formulating the Budget, the finance ministry assumed the rupee would stand at 48-50 against the dollar in the first quarter of 2012-13. And, appreciate to below 48 for the rest of the year, on the strength of the Budget proposals and pick-up in growth.
However, the rupee remained above 50 in the initial days of the first month of this financial year. This may prove to be an aberration later, but economists say the exchange rate assumption seems optimistic, considering the volatility and uncertainty prevailing globally.
Any significant deviation from the assumption may impact the import bills factored by the ministry while making provisions for oil and fertiliser subsidies that would affect the fiscal deficit, besides the overall current account deficit and inflation.
The effect also depends on the extent to which the government absorbs the resultant increase in import prices or passes this on to consumers. Also, customs duty may yield higher realisation, which should also be factored into the assessment, say economists.
Rs Vs USD
|Compiled by BS Research Bureau |
"We assumed the rupee would remain in the range of 48-50 against the dollar in the first three months of this financial year and then appreciate to below 48, as economic growth gains momentum and Budget announcements like the opening up of the external commercial borrowing (ECB) window for certain sectors are implemented," a senior finance ministry official said.
Madan Sabnavis, chief economist at CARE Ratings, expects the rupee to remain in the region of 48-52 against the dollar for the entire 2012-13, as "FIIs (foreign institutional investors) will remain uncertain for the major part of the year, due to the Vodafone tax case".
Given that the euro will remain under pressure, demand for the dollar will remain strong in the international market. This will also depreciate the rupee, he says. The greater uncertainty in the exchange rate will further impact inflows through ECBs.
Arun Singh, senior economist, Dun & Bradstreet, says the rupee is not expected to fall below 48 any time before December. In times of crisis, investors trust only the dollar, he says. Any significant deviation from the exchange rate assumption of the finance ministry will impact its other estimates, economists say.
It may become difficult to contain subsidy at under two per cent of gross domestic product (GDP), as targeted by the Budget, from the current 2.4 per cent, as the import bill of oil and fertilisers will rise. Subsidies are something the government has no control on, according to Singh.
"The subsidy burden will depend on the extent to which the government will absorb the global rise in prices due to the exchange rate or transfer it to consumers," say Sabnavis.
If the government transfers the resultant rise to the consumer, it'll stir inflation. However, the impact may be a one-time effect only. The Budget has pegged inflation at 6.4 per cent for 2012-13.
If the government absorbs the increase in import bills, achieving the fiscal deficit target of 5.1 per cent may be a problem. "Fiscal deficit will be around 5.5 per cent next financial year," says Singh.
But the increase in the import bill will also result in increased revenue collections in terms of customs duty, balancing the increase in expenditure. "Crude oil constitutes 30 per cent of our overall imports, and has an inelastic demand, while that is not the case with gold and coal," says Sabnavis.
This means if the import bill rises, oil imports may not come down, but those of gold and coal may. Customs duty collections will rise in proportion to the rupee depreciation, especially in the case of crude oil.
However, Sabnavis says there will be no fixed exchange rate of the rupee prevalent throughout the year. There will be phases of appreciation and depreciation, but the rupee will not fall below 48 in 2012-13.
The government had pegged oil subsidy at Rs 23,640 crore for 2011-12, which was revised to Rs 68,481 crore. For this financial year, the Budget estimate is Rs 43,580 crore, which many economists say is unrealistic. However, finance minister Pranab Mukherjee had said the government would hold talks with the Opposition and state governments to evolve a consensus on oil reforms to bring down subsidy. The government had estimated Rs 6,983 crore on imported fertilisers for 2011-12, but this was revised to Rs 13,883 crore. For this financial year, the estimate is Rs 13,398 crore.
The Centre's fiscal deficit is estimated to be zooming to 5.9 per cent of GDP, against the Budget estimate of 4.6 per cent for 2011-12. For 2012-13, it is estimated to narrow down to 5.1 per cent. India's current account deficit (CAD) stood at a record four per cent in the first nine months of 2011-12. For the entire year, it is estimated to be 3.6 per cent.
Two most important reasons for the increase in CAD were oil and gold imports. "CAD is expected to stay at 3-3.5 per cent this financial year," Sabnavis says.
Anis Chakravarty, director, Deloitte, Haskins and Sells, says FIIs are expected to increase investments during June-October, as has been the trend since the past two-three years.
"The assumption of finance ministry is quite practical in that respect," he says.