Upside risks to fiscal deficit emerges following duty cut on fuel: Finance Ministry
Jun 20, 2022
New Delhi [India], June 20 : Government revenues have taken a hit following cuts in excise duties on diesel and petrol, posing an upside risk to the budgeted level of gross fiscal deficit, the Department of Economic Affairs said in its Monthly Economic Review for May 2022.
In a significant step aimed at providing relief to people from high fuel prices, the Centre in May had announced a reduction in excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre, and also urged States to also reduce value-added taxes on petroleum products to give relief to the common people.
The capital expenditure Budget for financial year 2022-23 was expected to underpin growth in the economy through its multiplier effect.
"Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency," the monthly report said.
Rationalising non-capital expenditure has thus become critical, not only for protecting growth supportive capital expenditure but also for avoiding fiscal slippages.
"Depreciation risk to INR (rupee) however still remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to increasing policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation," the report added.
Notably, the US central bank last week raised the key policy rates by a steep 75 basis points, against expectations of 50 basis points hike to address the multi-decadal high inflation in the country.
It is observed that inflation in advanced economies has been surging for over a year whereas in emerging market economies the surge has been a recent phenomenon.
In India, retail inflation has been over the Reserve Bank of India's upper tolerance band of 6 per cent for the fifth consecutive month in a row in May, while the Indian central bank projects that it would continue to remain high till the third quarter of the current financial year 2022-23, before moderating. Besides, domestic wholesale inflation has been in double-digit for over a year now.
The imported components of high retail inflation in India have mainly been elevated global prices of crude and edible oil, said the report, adding that the onset of the summer heat wave in the country also contributed to the rise in food prices.
"However, going forward, international crude prices may be tempered as global growth weakens and the Organisation of Petroleum Exporting Countries (OPEC) increases supply. But, the timing of this remains uncertain and there are also upside risks to oil prices as OPEC supply will not be enough to match the shortfall caused by potential withdrawal of Russian crude from the market."
That said, the report, however, says that India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up.
"Further, its medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade. Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability," it added.
