Calling for a steep increase in prices of diesel if the government were to adhere to the target, the under-recoveries are threatening the fiscal arithmetic.
"The rupee depreciation could increase oil subsidy by 0.1 per cent to 0.4 per cent of GDP this fiscal and this alone could push fiscal deficit over 5 per cent of GDP as against the budgeted 4.8 per cent," the ratings agency said in a report.
"Even though it has been consistently raising diesel prices by 45-50 paise per month to bring the price at par with global crude prices, under-recoveries on account of diesel, kerosene and cooking gas "are threatening the the fiscal arithmetic," it said.
Commenting on the rupee depreciation, it said the budgeted amount of Rs 65,900 crore towards oil subsidies and Rs 65,000 crore on the oil subsidies was set when the rupee was trading at the 53-54 levels against the dollar.
It can be noted that since the beginning of the fiscal, the rupee has lost up over 20 per cent and had hit all time low of 68.85 against the dollar on August 28. It has, however, gained ever since the government and RBI announced a series of measures and also because of the US Fed's decision to postpone the taper.
India Ratings said the price of the Indian basket of crude rose by 28 per cent since April, pushing the daily under- recoveries of oil marketing companies to Rs 461 crore in the first fortnight of September, up from Rs 349 crore in April.
The under recoveries on diesel alone shot to Rs 14.5 per litre in the first fortnight of September, it said.
"In all likelihood, oil subsidy in FY'14 will be higher than the budgeted amount of FY'14," it said.
On the fertiliser front, India Ratings expressed some hope, saying it does not expect any uptick from the budgeted targets as the global prices have declined between 11.3 to 23.9 per cent since April.
Acknowledging the recent appreciation in the rupee, the report said the rupee is unlikely to go up to levels seen when the budget was prepared.