Officials said that India’s government will not be able to cut its budget deficit in the current fiscal, but will try to contain the shortfall at last year’s level to prevent a major slump in public finances.
Efforts to maintain some fiscal discipline reflect New Delhi’s concern about risks to its sovereign credit rating, but will likely limit the government’s firepower to control inflation and provide relief to households and businesses. In February, Prime Minister Narendra Modi’s government set a fiscal deficit target of 6.4% of gross domestic production (GDP) for the year beginning April 1, compared to 6.7% last year.
Sources said the increase in spending to relieve inflation means the government will miss this year’s target, with policymakers trying to limit the deviation to 30 basis points. “We will try to contain the fall to last year’s level,” an official told Reuters on condition of anonymity.
Rising costs forced India to cut fuel taxes and change the duty structure in May, reducing revenue by about $19.16 billion, while additional fertilizer subsidies pushed up expenditure.
India’s government and central bank have scrambled to control prices through fiscal measures and monetary tightening after inflation hit several-year highs. Retail inflation has remained above the Reserve Bank of India’s mandated limit of 6% for five consecutive months, while wholesale price inflation has hit a 30-year high.
India’s government is wary of the risks of fiscal slippage to its sovereign credit rating. Its debt to GDP ratio, which currently stands at around 95%, is well above the 60-70% level for other similarly rated economies. This leaves little room for the government to provide additional relief, as the May measures are already expected to widen the deficit by more than 30 basis points if revenue collections do not exceed the budget target.
A second source aware of the discussion said, “The government can certainly do more but at what cost? If more steps are taken, it will require additional market borrowing and this will increase yields and ultimately lead to higher inflation.”
The government is reluctant to extend its record market program of Rs 14.31 trillion in the current fiscal, with both officials saying a decision on the additional borrowing requirement will be taken only in November.
India’s finance ministry did not immediately respond to requests for comment.
The first official said the fertilizer subsidy bill could increase by Rs 500-700 billion from the current estimate of Rs 2.15 lakh crore. Higher crude oil prices were also adding to the challenges while the scope for tax cuts was limited.
“We know we may have to brace ourselves for more measures, but that could mean reducing other growth-focused spending,” he said.
The second official said while there is little room for further measures by the central government, state governments need to do more to help control inflation.
The first official said tax collection remains a “bright spot” and has given the government some room for maneuver.
From April to June 16, the government’s direct tax collection grew 45% year-on-year to Rs 3.4 trillion, while indirect tax collections grew by nearly 30% in April-May.