Rupee fall likely to hit govt finances with ballooning subsidy bill | Business Standard News

Clipped from: https://www.business-standard.com/article/economy-policy/eroding-rupee-may-impair-centre-s-finances-via-higher-subsidy-bill-122071901233_1.html

The finance ministry has hinted that India’s fertiliser subsidy bill for 2022-23 (FY23) could rise to around Rs 2.5 trillion against Budget Estimates (BE) of Rs 1.05 trillion

Populist, popular, welfare in  context of subsidy

Retail inflation has remained above the 7-per cent mark for three consecutive months until June and above the upper tolerance band of the central bank of 6 per cent for the sixth straight month.

A depreciating rupee — that touched Rs 80 per dollar in intraday trade on Tuesday — may adversely impact central government finances through a higher subsidy bill, albeit higher inflation possibly increasing government revenue.

With already elevated crude and fertiliser prices due to the ongoing Russia-Ukraine stand-off, an eroding rupee will add to the import bill and subsequently the subsidy burden on the government.

The government sells fertilisers at subsidised rates to farmers and provides cooking gas subsidies through Pradhan Mantri Ujjwala Yojana (PMUY).

“Subsidy burden of the government will increase with a depreciating rupee because a very high proportion of our subsidies is on fertilisers and petroleum products. Global shortage of fertilisers has already kept prices at raised levels,” says former chief statistician Pronab Sen.

The finance ministry has hinted that India’s fertiliser subsidy bill for 2022-23 (FY23) could rise to around Rs 2.5 trillion against Budget Estimates (BE) of Rs 1.05 trillion because of a global supply shortage in the midst of war in Ukraine.

Apart from the already announced Rs 1.1-trillion increase in fertiliser subsidy, the Narendra Modi government’s decision to extend the PM Garib Kalyan Anna Yojana until September will increase the food subsidy outlay for FY23 to Rs 2.87 trillion, from BE of Rs 2.07 trillion.

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 PMUY will cost the exchequer Rs 6,100 crore per year.

CRISIL’S Chief Economist D K Joshi says if crude oil prices rise further, they may put pressure on the government to further cut excise duty on fuel items to give consumers relief from inflation.

“The government may have to further reduce duties if global crude prices don’t descend. That will also have revenue implications,” he added.

Retail inflation has remained above the 7-per cent mark for three consecutive months until June and above the upper tolerance band of the central bank of 6 per cent for the sixth straight month.

The impact of excise duty cuts on petrol and diesel in May is expected to be around Rs 85,000 crore for the year, while import duty cuts on other items is likely to lead to a revenue loss of Rs 10,000-15,000 crore.

Since most taxes of the central government are ad valorem, including Customs duty and the goods and services tax, higher imported inflation due to rupee depreciation should ideally boost tax revenue.

A higher nominal gross domestic product due to inflation may also cushion fiscal slippage. Since elevated inflation could burden the economy, the upside to revenue collection may be limited.

“When government revenue goes up, it is, in fact, equivalent to an increase in tax rates. Any increase in tax rate is a contractionary policy. This can lead to a slowdown in the economy,” says Sen.

Joshi says a higher inflation rate will injure purchasing power, especially the poor’s.

“On a net basis, the weakening of the currency will have a more adverse impact on the economy,” he adds.

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