The UPA government have announced duty cuts, issued fresh oil bonds and the highest hike in fuel prices during its tenure to partially offset oil PSUs mounting losses on Wednesday. While the measures may help the oil Companies balance sheets look slicker, the Centres own finances are expected to take a significant hit.

The duty changes in the customs and excise duty on oil and petroleum products are expected to cause revenue losses of about Rs 22,660 crore this fiscal, revenue secretary PV Bhide said. Oil bonds worth of Rs 94,601 crore will also be issued to state-run oil marketers BPCL, HPCL and IOC taking the governments oil bond issuance tally over the last four years to Rs 1,65,000 crore.

While the revenue secretary said that the duty cuts impact on the Centres revenue collection targets would be assessed later, economists expect the fiscal deficit for 2008-09 to shoot up to 3.2%-3.5% of Gross Domestic Product (GDP), as against the Budget Estimate of 2.5%.

The revenue losses alone would raise the fiscal deficit to 3.2% in 2008-09, as against the budget estimate of 2.5% of the GDP, says chief economist at CRISIL, DK Joshi. The deficit could rise further considering the other pressures including the farm loan waiver, fertiliser subsidy and the pay commission, he added. HDFC Bank chief economist Abheek Barua agreed and said, The revenue losses and the oil bonds will push up the Centre's core fiscal deficit to anywhere between 3.2% of the GDP to 3.5% of the GDP. This however is within the comfort zone of the FRBM. But if off-Budget liabilities (farm loan waiver, fertiliser subsidy, etc) are also taken into consideration, the fiscal deficit for 2008-09 would rise up to 4.5% to 4.7% of the GDP, he added.

Incidentally, the Reserve Bank of India governor YV Reddy had recently put the Centre in a spot when he said that though the country's fiscal situation has improved, the deficit numbers for 2007-08 do not reflect the several underlying fiscal pressures.

The Rs 94,601 crore worth oil bonds, taken along with the fertiliser bonds worth Rs 95,000 crore to be issued this fiscal, would mean that the government would have to spend way over Rs 10,000 crore on servicing these two bonds. Apart from the short run outgoes, government finances may be adversely impacted in the long run as well.

While  the bonds have a tenure ranging between 9 to 15 years a point in time when analysts expect government finances to be under severe pressure to meet their redemption liability. While this impact would be felt after 10 years, they will continue to create pressures on government balance sheet. The government in most likelihood will have to redeem these oil bonds by issuing fresh oil bonds, said Barua. The impact on state finances is however not expected to be as severe. The Centre's net realisation of revenue from taxing oil and petroleum products was just about Rs 10,000 crore in 2007-08, after devolution of taxes to states and oil bonds are factored in. However, state governments managed to earn close to Rs 60,000 crore from state level taxes and their share of taxes from the Centre in the last fiscal. However, the crisis in the Centre's finances will get eventually reflected on states as well. It's not a good situation for now from the country's perspective, Arvind Mahajan executive director KPMG, said referring to the high indirect subsidy on oil and the duty cuts.

But in the medium term of two to three years, oil prices will come down as demand will get curtailed internationally at this price level and supply situation will improve.