Global consultants Ernst & Young on Friday cautioned it would be difficult for the government to rein in inflation due to surge in oil prices coupled with two per cent cess on all taxes and hike in services tax.

"Inflation is hovering around 5.5 per cent and with the two per cent cess on all taxes, increase in service tax to 10 per cent and the rise in prices of petrol, diesel and LPG, the government will be hard-pressed to contain inflation which threatens to rise further," Ernst & Young partner Mukesh Butani said.

Addressing a CNBC Budget discussion, he said inflation was at 4.5 per cent in most part of 2003-04 but crossed five per cent in the first quarter of this year.

"Manufacturing sector contributed 80 per cent to the rise in inflation," Butani said, adding the sector is not growing at the rate it should be.

On revenues, he said though the government has introduced new taxes, increased the rate in some cases and achieved a revenue deficit of 2.5 per cent of GDP, there could be a shortfall of as much as Rs 4,000 crore (Rs 40 billion) in revenues due to freebies granted, especially to the farm sector.

On the fiscal deficit, he said it had only decreased marginally and more needs to be done to prune the consolidated deficit of the country.

"The combined fiscal deficit of the Centre and states worsened to 9.4 per cent of GDP in 2003-04, which was only marginally down from 10 per cent in 2002-03," he said.