Expenditure worries
The fiscal road ahead could get bumpy
The first quarter of the current financial year is almost over, and the fiscal signs are not propitious. In the Union Budget for 2018-19, the government postponed the path of fiscal consolidation. The previous year’s fiscal deficit target had been breached; this year’s target was set at 3.3 per cent, as opposed to the 3 per cent recommended by the fiscal consolidation path. There are now very real reasons to worry about even this number. It is true that collections from indirect taxes following the introduction of the goods and services tax (GST) last year appear to have stabilised, providing some comfort on the revenue front, even though disinvestment receipts might be weakened by the failure to sell Air India. However, there are worries about the expenditure side that need to be addressed, and will certainly play on the mind of the Monetary Policy Committee of the Reserve Bank of India going forward.
Less than a year away from the next general election, populist pressures must be taken into consideration. In recent years, low crude oil prices have benefitted the government’s finances in two ways. On the one hand, it has ensured that fuel and fertiliser subsidies do not play a spoiler in the Budget the way that they did during the second term of the United Progressive Alliance. At the same time, lower oil prices have also allowed the government to steadily raise taxes and cesses on petroleum products, which came in handy for bumping up revenue collection. As a consequence of rising global demand for oil and production cutbacks by oil producing countries, prices at the pump in India are now as high or higher than they were under the UPA. This has been used as a political point by the Opposition, putting pressure on the government to reduce such taxes, and, in turn, adversely affecting revenue collection.
Meanwhile, fertiliser subsidies will increase. Alleviating rural distress is a major political priority but, according to credit rating agency ICRA, an increase of a single dollar in the cost of natural gas raises the cost of production of urea by ~1,800-2,000 per metric tonne (MT), while for every one rupee depreciation against US dollar, the same rises by ~240 per MT at a constant gas price. The rupee is at historical lows against the dollar at the moment. It is likely that this will increase the subsidy bill by ~90 billion. Arrears are also building up. Food subsidies and the cost of procurement of grain from farmers is also increasing. For wheat alone the minimum support price this season is ~1,735 a quintal, ~110 more than last year; already, wheat procurement this season is 14 per cent higher than last year and it may increase further. Concerned by farmer anger in states such as Uttar Pradesh and Maharashtra, the government has also announced special packages for sugar that it estimates will cost an additional ~70 billion. This does not even take into account additional spending on new programmes such as the Ayushman Bharat health insurance scheme or a rise in off-balance sheet contingent liabilities — such as, for example, LIC being asked to pick up a stake in the struggling IDBI Bank. Altogether, the fiscal road ahead could get bumpy. Greater clarity and caution from the finance ministry is needed.