Global headwinds
The Red Sea disruption has raised concerns over reliance on global supply chains, further aggravating the slower growth in global trade. Exporting one’s way to growth thus will not be easy. The government of course is mindful that the elevated risk of geopolitical conflicts is an area of concern for the growth story.
The potential risk factors for the economy pertain to higher fuel prices as the country imports 85% of its requirements. Elevated oil prices raise the current account deficit and also hit growth. So far, a fortunate circumstance is that despite the raging war between Hamas forces and Israel’s army since October 7, global oil prices have not flared up. Though, in the initial weeks, Brent crude spot prices remained elevated at $90-plus a barrel, they have now settled down to lower levels of around $79-80 a barrel. The attacks on shipping in the Red Sea by Yemeni Houthi forces continue unabated. And as the conflict spills over from Israel to Lebanon and Syria and ultimately involves Iran, the outlook on global oil prices cannot be assumed to remain benign. Taken together with the fragmentation and disruption of supply chains, competition for critical minerals and technologies, the difficult global environment does pose serious risks to an important growth engine for the economy, notably exports. The interim Budget and the Indian economy review, however, appear bullish on the country’s prospects of dealing with them and growing at a rapid clip of 7%-plus in the future.
It is surprising that the subsidy numbers of the interim Budget do not fully reflect this challenging global conjuncture. Of course, it can be argued that this interim Budget is only meant to provide funding for essential expenditures for the first four months of the financial year before a new government takes over; that these numbers are not cast in stone and can be changed when the full Budget is presented. Yet, the under-provisioning of fertiliser, food and fuel subsidies does raise concerns.
Possibly, the government’s confidence is because it has dealt with the post-pandemic crises in sky-rocketing fertiliser and fuel prices and, hence, the overall subsidy burden has been estimated to decline from 1.4% of GDP in FY24 to 1.2% of GDP in FY25, led by a 13% decline in fertiliser subsidies, 3% in food and 2.6% in petroleum. It is quite possible that increasing domestic production of fertilisers is contributing to the expected lower subsidy bill. For example, import of urea, the most commonly used fertiliser in India, is at 4-5 million tonnes this fiscal, lower than the 7.5 mt imported in the previous year. Even then, the question still lingers: While there has been an upward revision in the revised estimates of fertiliser subsidies in FY24 to protect farmers from the negative effects of an increase in global fertiliser prices, why then should there be an actual fall in the interim Budget numbers for FY25?