The crisis in West Asia and the resultant surge in prices of crude oil have significantly complicated the overall Budget arithmetic
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The Reserve Bank of India’s (RBI’s) Central Board last week decided to transfer a surplus of ₹2.87 trillion for 2025-26 to the Government of India. The RBI also decided to reduce the provisioning under the contingent risk buffer to 6.5 per cent of its
balance sheet, compared to 7.5 per cent in the previous year. Although the RBI’s economic capital framework allows it to keep the contingent risk buffer between 4.5 and 7.5 per cent of its balance sheet, it is unclear why the central bank decided to reduce the buffer. Although the amount transferred is about 7 per cent higher than that of the previous year and is a new record, it is unlikely to ease fiscal pressures significantly for the government. The surplus transfer is in line with expectations, and the government had already budgeted for it. This year’s Budget estimate for dividend/surplus from the RBI and nationalised financial institutions is ₹3.16 trillion. However, the government’s total dividend receipts could be substantially lower this year. Oil companies are usually major contributors, but they may not be able to contribute much.
The crisis in West Asia and the resultant surge in prices of crude oil have significantly complicated the overall Budget arithmetic. The state-run oil-marketing companies (OMCs) were reported to be facing underrecoveries worth ₹1,000 crore per day until recently. Three increases in the pump prices of petrol and diesel have helped reduce those, but more needs to be done. At this stage, it is difficult to gauge the extent of the damage high oil prices may have caused to the finances of OMCs. Only the June-quarter results will provide a clear picture because the March quarter will reflect only a partial impact. But dividends are not the only factor that will affect government finances. The government may have to substantially increase expenditure in certain areas, such as fuel and fertiliser subsidies, while also facing pressure on the revenue front.
The government has reduced special additional excise duty on petrol and diesel, which could lead to an annual revenue loss of about ₹1.5 trillion. Besides, tax collection would suffer due to the supply-chain disruption and lower production. It is also worth noting that the monsoon is expected to be below normal this year, which could have implications not only for food production but for overall demand. A consumption slowdown could again increase demands on the Budget while affecting revenue collection. The government has budgeted to contain the fiscal deficit at 4.3 per cent of gross domestic product, which now looks difficult. Much will depend on how long the West Asia crisis persists and how the government approaches its plan for capital expenditure.
While the RBI has done its bit in supporting the government through surplus transfers, it faces its own challenges. The rupee has been under pressure and is inching towards the 100 mark against the dollar. As economists have rightly argued, the RBI should not aim to defend the currency to prevent it from crossing a psychological mark. The other big challenge will be responding to the inevitable increase in the inflation rate. Since the monetary policy needs to be forward-looking, projecting the inflation rate over the next four to six quarters and adjusting the policy accordingly will be enormously complicated in the current environment. Bond yields have been rising in anticipation of tighter monetary policy and possible fiscal slippage.
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