There are two things that the Indian government would heartily wish for in 2011. One is bringing inflation down to acceptable levels. The other is to get its finances in order. While one of the two objectives could be achieved, meeting both targets seems like a tall order, indeed.
One factor that could create considerable havoc is a spike in crude oil prices. The Indian government already has its hands full trying to bring the current inflation down. Rising food prices and spikes in certain non food items have meant that inflation continues to persist at high levels. Throw in higher fuel prices and you have a scenario where the government's aim to bring inflation down will go awry. The government has lifter control over petrol prices with the rise in oil prices. But it still decides the price of diesel, kerosene and LPG.
Now, if oil prices continue to rise, and the government decides that it has to keep inflation within check at any cost, it will then have to continue doing what it has been doing for the past several decades. Subsidize fuel prices. This means that it will have to compensate oil marketing companies for the losses that they incur on lower market prices for fuel. The higher oil prices go, the larger the subsidy will have to be. And higher subsidies mean that the government will find it difficult to bring down its deficit. Readers would do well to recall that the government had laid a roadmap for bringing down fiscal deficit to 4.8% by FY12.