As the Prime Minister’s Office (PMO) and finance ministry held busy preparatory meetings on Friday ahead of the weekend’s crucial review of the economy by Prime Minister Narendra Modi, it was clear that the government would avoid being seen jittery over the recent slide of the rupee or the pressure on the twin deficits. Rather than any haphazard, overblown reaction to the currency volatility — even as the rupee has turned out to be Asia’s weakest currency in 2018, economists reckon that it has undergone only a natural correction after being overvalued for long — what could come out of Saturday’s meeting is a rejigging of the government’s expenditure priorities and a calibrated plan to check import surges in certain items to rein in the current account deficit (CAD).
Official sources maintained that a cut in excise taxes on fuel was not on the agenda, given the need to maintain fiscal produce and keep budget spending strong when elections were around the corner and a capacity overhang that continued to hamper private-sector investments.
The progress of large projects launched by the NDA government would be critically reviewed in the meeting, the sources added. According to a source, the PMO had sought “status reports on completed, commissioned, under-implementation projects” among the ones inaugurated or foundation stones laid by the PM. It sent letters in this regard to Rail Board, the ministries of road transport and highways, power, steel, shipping, housing and urban affairs, food processing industries, and health and family welfare.
Reserve Bank of India (RBI) governor Urjit Patel has also been called to the capital for the review session which would also be attended by the NITI Aayog and the prime minister’s economic advisory council, apart from finance minister Arun Jaitley and senior finance ministry officials.
Options such as NRI bonds to prop up the rupee are also under consideration and a conditional go-ahead may be given to the RBI in this regard. However, whether and when these would be exercised would be decided after gauging the market, the sources added.
Of the top ten ministries in terms of spending capacity, six including rural development, roads and highways, agriculture and railways registered handsome increases in expenditure in the first quarter of FY19, reflecting the Narendra Modi government’s priority areas ahead of the general elections next year.
For the remainder of the fiscal, the idea is to buttress spending in areas where the relevant agencies show the required spending capacity and where a perceptible difference would be felt by the people thanks to the outlays. The latest data reflecting a significant moderation of inflation have added to policymakers’ confidence — despite the weakness in the rupee adding to the upside risk, annual retail inflation in August was 3.69%, the first month in 10 in which it was below the RBI’s medium-term target of 4%; driven by a deepening of disinflation in food items, WPI inflation too fell to a four-month low of 4.53% in August.
Even as public expenditure continues to be critical to growth, the budget is under severe pressure given the large shortfall in goods and services tax (GST) revenue and slow progress on the disinvestment front. The Centre’s total expenditure and revenue expenditure grew 8.7% and 6.6% in Q1FY19 versus 27.1% and 25.8% in the year-ago quarter. So, the extra budget resources (EBR) route will be tapped more aggressively this year to fund food subsidy arrears, Pradhan Mantri Awas Yojana, electrification programme, higher education infrastructure, Swachh Bharat Mission and irrigation projects, among others.
As reported by FE earlier, the Centre has lined up plans to raise a massive Rs 1.7 lakh crore via the EBR route in the current fiscal, up 110% from FY18. These loans, all of which will have to be serviced out of the Budget, will be mobilised through assorted public-sector entities; the latest instance of this was the recent Cabinet decision to enhance the government guarantee for Nafed to undertake procurement of pulses and oilseeds by Rs 16,550 crore to Rs 45,450 crore this fiscal, under the package of price support schemes for farmers.
Even when the there are serious worries over the revenue receipts, the Centre has continued to push budgetary capital expenditure — in April-June 2018, it stood at Rs 86,988 crore, 27% higher than the same in the year-ago quarter and 29% of the full-year target.
Even though a NITI Aayog panel under Ratan P Watal had suggested that the import duty and the GST on gold be trimmed to “as low as possible” to discourage smuggling and improve tax compliance, the thinking now is to curb imports of the metal. Import volumes of the precious metal shot up by a staggering 117% in August from a year earlier, as jewellers replenished stocks to cater to festive season demand. Curbs could be imposed on electronics imports, too, as these went up by 12.2% between April and July to $18.46 billion, while exports of these items stood at only $2.34 billion, leaving a trade imbalance of $16.12 billion.
Although the GDP grew 8.2% in the first quarter of this fiscal, it was aided by a favourable base that is set to wane. The CAD, which exerts pressure on the rupee, is forecast to worsen to around 2.5% of GDP this fiscal, against 1.9% in 2017-18, mainly due to elevated oil prices.
Many, however, feel that the economy is now in much better shape than what it was in 2013. When the rupee hit 68.85 after the taper tantrum talks by the US Federal Reserves, the RBI was forced to launch the maiden NRI bonds and mopped up $34 billion with a three-year maturity. While there was a 23% fall in the rupee between January and August 2013, this year the drop has been over 12%. The fiscal deficit then was around 4.8% of GDP but the deficit was only 3.5% in 2017-18. CAD, too, was 3.4% then and only 2.4% now (in Q1FY18). Average crude oil price was over $100 per barrel in January to August 2013, while it was around $75 in the same time this year.