The Indian rupee is tumbling against the US dollar. If Reserve Bank of India (RBI) does not intervene, it won’t be a surprise to see the rupee hit 100 to a dollar. RBI needs a minimum of $50-60 billion war chest to arrest the fall, that too for a short while. The underlying reasons are not within RBI’s control. The Middle East crisis is finally hitting India pretty hard. Energy and fertiliser costs have almost doubled. The gradual increase of petrol prices by roughly Rs 3-4/litre is not sufficient. So is the case with liquefied petroleum gas (LPG), or liquefied natural gas (LNG), or fertilisers, especially urea. All this will blow up the fiscal deficit, which may cross 5% of GDP.
Foreign portfolio investors (FPIs) are withdrawing their investments; domestic investors are equally worried and not investing significantly. The Indian Meteorological Department (IMD) is forecasting a strong El Nino. As a result, the Indian economy is losing momentum. Our calculations based on present conditions, indicate that in the current financial year, India will be lucky if it clocks 6% GDP growth and contain Consumer Price Index (CPI) inflation below 6%.
If the Strait of Hormuz remains closed for another three months, the GDP growth will fall below 6%, and CPI inflation will shoot above 6%, which is the upper band of RBI for inflation control. RBI will not have much options but raise the repo rates, resulting in the increase of all interest rates. The economy seems to be on the brink of a major economic crisis. The only rational way to avoid this crisis will be to carry out major reforms, a la 1991.
Macroeconomic Headwinds
Prime Minister Narendra Modi had called for austerity measures, and some Chief Ministers did photo-ops of them travelling on motorcycles, metros, electric vehicles (EVs), etc. This tokenism does not last for long. Upon his return from a five-country visit, PM Modi held a meeting with his cabinet colleagues and asked them to carry out reforms that can save resources, especially energy; narrow down the twin deficits of trade and current account; and restore confidence in India’s growth story. The technical blueprint of economic reforms is not difficult to prepare, but the political will to undertake such reforms is the need of the hour. The tendency to distribute freebies in India—at the central and state level—is now deeply entrenched. That’s the biggest hurdle in carrying out structural reforms. Let us demonstrate with the examples of fertiliser and food subsidies.
Take the case of fertilisers. India imports anywhere from 20-25% of its urea requirements. The last tender to import showed that the minimum price of urea’s landed cost on the west coast would be $935/tonne, but it is being sold at less than $70/tonne to farmers. Is this wisdom or stupidity? Let the readers judge. But what we know is that it creates such a significant arbitrage that a large amount is being diverted from agriculture to other industrial uses in India and also smuggled out to neighbouring countries. To cite an interesting example, take Bihar.
There is a difference of 50% between figures for urea, di-ammonium phosphate (DAP), and muriate of potash (MOP) supplied and those on fertilisers actually utilised (cost of cultivation data, used for determining Minimum Support Prices of major crops). Where does the remaining go? Anyone familiar with the ground realities will tell you that Bihar is an easy route to Nepal. Ground reports also suggest that our fertilisers are smuggled to even Bangladesh from neighbouring districts. It is all because of the huge urea subsidy (almost 90%).
Subsidy Overhaul
The fertiliser subsidy bill, budgeted at Rs 1.71 lakh crores for FY27, is surely going to cross Rs 2.25 lakh crore, and it won’t be a surprise if it touches Rs 2.5 lakh crore. The ultimate solution (Brahmastra) for this is to reform the entire chemical fertiliser subsidy regime, move towards direct benefit transfer (DBT) on a per acre basis, and club it with PM-Kisan amount. The issue of tenants can be solved by triangulating different types of data, provided the PM prioritises it like the Jan Dhan accounts, and linking them to mobile and Aadhaar. Further, fertiliser prices should be determined by market forces.
Doing so will plug the urea leakage and correct the nitrogen (N), potassium (P), and phosphorus (K) imbalances in use will be corrected, raising Nutrient Use Efficiency (NUE). This will save the government at least Rs 40,000-50,000 crore annually. The second best solution will be to put quantitative restrictions on sales, linking them with holding size and crops grown. The third alternative is to put urea under the Nutrient Based Subsidy (NBS) Scheme and raise its prices while reducing those for P and K, keeping the overall subsidy bill at Rs 2 lakh crore.
The food subsidy, budgeted at Rs 2.28 lakh crore in FY27 must be observed too. When the government takes credit for reducing poverty to 5.3% as per the World Bank’s definition of extreme poverty or 11% as per NITI’s Multi-Dimensional Index, why does it give free food to more than 800 million people? It needs to either trim the coverage or increase the issue price for those above the poverty line. It has the potential to save another Rs 50,000 crore per year.
Not undertaking any of these reforms will only show the government’s timidity.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express. Ashok Gulati and Ritika Juneja are respectively distinguished professor and senior fellow, ICRIER