The new spell of the rupee’s decline has raised fresh concerns over the country’s fiscal situation, as any prolongation of it could partly or even fully offset the benefit from recent correction in global commodity prices and inflate the subsidy expenditure, especially on fertilisers.
However, the government may still manage the fiscal deficit within the Budget target of 6.4% of GDP in FY23, thanks to higher tax revenues than budgeted and revenue expenditure adjustments. “The weakness in the INR (Indian rupee) will partly counter the correction in commodity prices and could exacerbate the requirement for fertiliser subsidy, pressuring the fisc,” Icra chief economist Aditi Nayar said.
The rupee slumped 19 paise to close at a fresh lifetime low of 80.98 against the dollar on Friday amid signs of escalating Russia-Ukraine tensions and a hefty rate hike of 75 bps by the US Fed, which has led to a vertical rally in the greenback. “We pencil in the INR to range within 79-83 for the rest of FY2023 and average around 80.2 in FY2023E,” Kotak said in a report on Friday.
To insulate farmers from the sharp increases in the prices, the Centre on May 21 announced a doubling of fertiliser subsidy to Rs 2.15 trillion from the budgeted level of Rs 1.05 trillion for FY23, because of a sharp spike in global prices of urea, di-ammonium phosphate (DAP) and muriate of potash (MoP) in the last one year. However, the fetiliser subsidy may rise further as LNG, the feedstock of urea, is under further pressure due to the protracted Ukraine-Russia war. Natural gas constitutes more than 70% of the cost of production of urea. The country also meets 20% of its urea requirements via imports as finished product.
Sources indicate that the Centre’s fertiliser subsidy may be more than Rs 2.3 trillion, or Rs 15,000 crore more than even the recently revised estimate of Rs 2.15 trillion.
Domestic natural gas prices, which more than doubled to $6.10/ mmBtu for April-December, may be raised further for October-March of FY23, said India Ratings chief economist DK Pant. Earlier this month, GAIL bought LNG shipments for October-November delivery above $40 per million British thermal units, more than double the price it paid a year ago. “Factoring in global fertiliser prices, fertiliser subsidy is likely to undergo major revision for FY23. Oil subsidy is unlikely to change much,” Pant said.
Global crude prices have softened in the past few months. The average Indian basket of crude prices has declined to $92.31/bbl in September from the high of $116.1/bbl in June 2022. However, the government may provide an additional about Rs 20,000 crore in LPG subsidy in FY23, over and above the budget target of Rs 5,800 crore, to cover the losses suffered by state-run oil marketing companies in the later part of FY22 and Q1FY23, for not fully passing on the price increases to consumers.
Importantly, the government is spending an extra Rs 80,000 crore on account of the extension of the free ration scheme by six months through September 2022. Any further extension of the scheme could exert more pressure on government finances. “It would not be prudent to extend the PMGKAY further, given the present fiscal position,” a senior official told FE.
Another government official acknowledged that upsides on revenues may not be sufficient to offset additional expenditures committed over and above the Budget Estimate (BE) for FY23.
“We have released subsidies as per the budgeted amount, additional subsidies incurred will be assessed during the revised budgetary process,” the official said. The finance ministry would commence deliberations next month on preparing revised estimates for the expenditure budget.
A large part of the about Rs 2.35 trillion extra spending on subsidies (without factoring in the possibility of extension of the free grain scheme extension beyond September) will be financed through extra tax receipts. Such extra receipts, according to an FE estimate, could be Rs 1.6-2 trillion, largely due to buoyancy in direct taxes and goods & services tax (GST). As the government has announced that it will stick to the capex of Rs 7.5 trillion for FY23 to support economic growth revival, it will prune revenue spending on various schemes to cater to higher subsidies.
“Unless the Pradhan Mantri Garib Kalyan Anna Yojana (free grains) is extended beyond September 2022, we do not expect the Government of India’s fiscal deficit to exceed 6.4% of GDP based on a nominal GDP projection of Rs 272.1 trillion (expansion of 15% as against the budgeted growth of 9.0% over the NSO’s provision GDP estimate for FY2022),” Nayar said.