The government may have to bite the bullet and cut excise duty on petro products | Photo Credit: –
Geopolitical tensions have impacted oil and other commodity prices. The deficit and growth numbers need to reviwed
Managing a budget of an economy as complex as India is always challenging as the projections go awry often because there are too many extraneous elements which come into the fray, upsetting calculations. The government had sought approval from the Lok Sabha with a third supplementary demand for grants under the force of circumstance for FY22 in March.
As volatile economic conditions are likely to continue until such time that the war ends, the assumptions made when drawing up the budget for FY23 must be revisited and probably revised given the evolving conditions.
The most obvious issue is disinvestment. The LIC disinvestment has been postponed because of the uncertain geo-political conditions. But the war is still on and while the DRHP filing has gone through with approvals, the same would hold till May, by which time the war may not have ended. Hence if disinvesting LIC was not appropriate in March it may not be so in May which in turn means that there will have to be a fresh submission.
Also if the target was say ₹65,000 crore which will be rolled over to next year, it will be hard to do an additional ₹65,000 crore which was targeted in the Budget for FY23.
The other big worry is on the price front where global commodities are witnessing a bull run for the second time not due to buoyancy in the world economy but due to severe disruptions which started from oil and has moved to other commodities as sanctions against Russia begin to bite.
The Budget did not conjecture that the crude oil price would increase to the present levels and went by the assumption of $70-75/barrel. The price had scaled past the $130-140 mark but has reverted to less than $100 mark. But one can never say where it would go in the coming months as the war does not seem to be ending anytime soon.
The government is under pressure to take some action on the price front. So far, the retail prices of fuel have remain unaltered with the OMCs bearing the additional cost. But soon the four players in the fuel market — Centre, States, OMCs and consumer — will have to share the cost of fuel increase unless the price goes back to the $70-80 range which looks unlikely.
So the government will have to cut back on its excise collections in case the excise rate is reduced. It was already lowered by ₹10/litre for petrol and ₹5/litre for diesel in November 2021.
The same problem percolates to the fertiliser segment. Last year the government had to increase the subsidy on fertilisers through the supplementary demand just as the second wave of Covid hit us.
However, the same was cut back by around ₹25,000 crore for FY23 from the revised number of ₹1.40 lakh crore for FY22 (which will now go up as per the third supplementary demand by another ₹15,000 crore). Higher oil and gas cost feed into fertiliser prices and the government cannot risk leaving things unattended as that can increase farming costs and add to inflation.
Today with the exception of edible oils, food inflation has largely been under control with good harvests barring seasonal shocks in horticulture. With core inflation being high, unchecked fertiliser prices has the potential of increasing prices of all farm products. Hence the subsidy element would have to be relooked.
The other area on the expenditure side is capex. There has been an announcement of a sharp increase in capex for FY23 to ₹7.5 lakh crore from a revised number of ₹6.03 lakh crore in FY22. With commodity prices increasing steadily especially of metals, the effective cost of projects that have been included in the budgetary plans would tend to increase. Therefore, the government may have to decide between two alternatives.
The first is to retain the outlay at ₹7.5 lakh crore but reduce the number of projects. The alternative would be to scale up for cost escalation, which can be between 5-10 per cent, given the increase in global commodity prices. This would also increase the fiscal expenditure part and with possible lower revenue can stress the deficit.
Another area where the government has been deploying funds is housing. Here the third supplementary grant has asked for around ₹30,000 crore for the subsidy component under the PM Awas Yojana. This increases the effective outlay from around ₹74,000 crore to ₹1.04 lakh crore. For FY23 the government had included a sum of ₹76,000 crore. Here too the government may have to take a call on whether it would be in a position to lower the allocation as per the Budget. It may be necessary to increase the allocation for the same.
Under these unusual circumstances the government should rework the budgetary numbers for FY23 and put out realistic revised estimates even before the new fiscal starts. This will also prepare the market better which is already guessing what the final outcome would be in terms of borrowing for the government.
In FY22 presumably there will be no additional borrowing as the government has cut back on certain expenditures while allowing for other additional expenses in certain targeted fields.
Also the government can also consider whether or not under these extenuating conditions there is a justification to stick to the 6.4 per cent fiscal deficit number. In fact there is a strong reason to rework the numbers on the basis of the assumption of 11.1 per cent nominal GDP growth that was assumed in the Budget being very conservative.
With the present scenario pointing to real growth of 7.5 per cent or so and the inflation deflator being in the 6 per cent region, a nominal growth rate of 13 per cent would be reasonable. This can be the base of all the conjectures on tax collections.
As these would be higher than assumed, there could be some flexibility provided to the government on the revenue side which in turn can accommodate the higher expenditure.
The writer is Chief Economist, Bank of Baroda. Views expressed are personal
Published on March 18, 2022