The finance ministry on Monday cautioned re-emergence of the twin deficit problem in the economy, with higher commodity prices and rising subsidy burden leading to increase in both fiscal deficit as well as current account deficit. This is also for the first time the government has explicitly talked about the possibility of fiscal slippage in the current fiscal year.
“As government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged. Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency,” the finance ministry said in its latest Monthly Economic Review.
The report said rationalizing non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages.
Finance ministry had earlier hinted that India’s fertilizer subsidy bill for FY23 could rise to around Rs 2.5 trillion compared to a budget estimate of Rs 1.05 trillion due to global supply shortage resulting from the ongoing Russia Ukraine war. Apart from the already announced Rs 1.10 trillion increase in fertilizer subsidy, the Modi government’s decision to extend the PM Garib Kalyan Anna Yojana (PMGKAY) till September will increase the food subsidy outlay for FY23 to Rs 2.87 trillion from the budget estimate of Rs 2.07 trillion. The impact of the latest round of excise duty cuts on petrol and diesel will be around Rs 85,000 crore for the year, while the recent import duty cuts on other items will lead to revenue foregone of Rs 10,000-15,000 crore. Additionally, the government’s decision to provide a subsidy of Rs 200 per gas cylinder (up to 12 cylinders) to over 90 million beneficiaries of Pradhan Mantri Ujjwala Yojana, will lead to revenue foregone of Rs 6100 crores a year for the exchequer.
The report said while the world is looking at a distinct possibility of widespread stagflation, India, however, is at low risk of stagflation, owing to its prudent stabilization policies. Stagflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
The high-wire balancing act between maintaining growth momentum, restraining inflation, keeping the fiscal deficit within budget and ensuring a gradual evolution of the exchange rate in line with underlying external fundamentals of the economy is the challenge for policymaking this financial year and successfully pulling it off will require prioritising macroeconomic stability over near-term growth, the report said.
While the Reserve Bank of India has increased policy rates by 90 basis points over a month’s time to fight record inflation levels in the economy, the finance ministry clearly brought out the limitations of raising interest rates. “Tightening fiscal and monetary policies can however address inflation only from the demand side, insofar as they are able to smother pent up demand and roll-back stimuli announced as part of the COVID-19 relief package. Simultaneously, from the supply side, trade disruptions, export bans and the resulting surge in global commodity prices will continue to stoke inflation as long as Russia-Ukraine conflict persists and global supply chains remain un-repaired,” it added.
Finance ministry said the economy’s medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade. “Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability,” it added.