Home / Politics / Policy /  Govt may borrow more, cut revenue expenditure

NEW DELHI : The government may borrow more than budgeted this fiscal, reduce revenue expenditure, or do both, as the recent duty cuts and subsidy hikes threaten to upset its fiscal math, an official aware of the discussions in the government said.

The additional borrowing requirement will be worked out later as the fiscal year has just started, the person said on the condition of anonymity.

The government expects the tax cuts on fuel over the weekend to cool inflation, which shot up to an eight-year high in April.

Following a fertilizer subsidy hike in April, the Union government on Saturday reduced duties on petrol, diesel and imported inputs to make steel and petrochemicals.

However, these measures to tame inflation also mean the gross market borrowing of 14.3 trillion budgeted for FY23 won’t be enough for the year.

“The additional fertilizer subsidy announced in April was roughly balancing against the expected additional tax revenue collection this fiscal. But this time, with the excise and import duty cuts, the government has to cut certain revenue expenditure or go for additional borrowing or do both," the official said.

In April, the government announced higher nutrient subsidy rates for the kharif season to absorb import costs, which have soared due to the war in Ukraine, given India’s complete import dependence on some fertilizers.

Finance minister Nirmala Sitharaman pointed to a 1 trillion revenue loss because of excise duty cut on auto fuels, besides an extra 1.1 trillion in fertilizer subsidy outgo, in addition to the 1.05 trillion subsidy announced in the budget.

Saturday’s cooking gas subsidy announcement will add an additional 6,100 crore to the subsidy bill.

With growth projections for India lowered by various agencies, including the Reserve Bank of India (RBI), the reduced revenue collections and increased subsidy outgo are expected to drive India’s FY23 fiscal deficit beyond the budgeted 1.6 trillion.

The duty cuts have implications at the state level as well.

Kerala finance minister K.N. Balagopal said that in response to the Centre’s excise duty reduction, the state would pass on the benefit of the resultant value-added tax (VAT) reduction in rupee terms to the people. States levy VAT as a percentage of the price refineries charge to dealers, inclusive of excise duty (ad valorem rate), while some states have a combination of ad valorem rate and a specific duty in terms of rupees per litre.

“We (LDF government) never raised VAT on petrol and diesel in the last six years, and once we reduced the rates. The practice during the earlier United Democratic Front government was to slightly raise the VAT rates when the central government lowered excise duty, which limited the benefit to consumers to the extent of the Centre’s excise duty reduction, a practice we have never done," Balagopal said in an interview.

Since his government never adjusted VAT rates like that, it was not reducing the ad valorem rate now and instead was passing on resultant relief on VAT in rupee terms to consumers as well, Balagopal said. The benefit to consumers in Kerala is 2.41 a litre on petrol and 1.36 a litre on diesel.

Rajasthan chief minister Ashok Gehlot tweeted on Saturday that following the central duty cut, VAT levied by the state, too, comes down by 2.48 a litre on petrol and by 1.16 a litre on diesel.

Tamil Nadu finance minister Palanivel Thiaga Rajan said on Sunday that it was not fair to expect states to reduce taxes, while Maharashtra said it was passing on the benefit in rupee terms to consumers.

The central government has already cut import duty on edible oils to tame inflation and is hoping a normal monsoon would ease food price inflation. However, on other items, the scope of government intervention is limited, except, for instance, by increasing the supply of certain items by making logistics easier.

“This is imported inflation. There is a limit to what the government can do as it is fuelled by the global situation, and we may have to wait patiently until these factors abate," the official cited above said.

Terming the excise duty cut a sensible move, Pranab Sen, former chief statistician of India, said that on the one side, the move would help reduce the “cost-push" factor of inflation, and on the other, it would also lead to the expansion of fiscal deficit. “It has possibly created space for the RBI to get more aggressive on their rate hikes," he said.

“Now the real question is how RBI does it because what is going to happen is, if everything else is left unchanged, the fiscal deficit will go up. It is still too early to have any idea on how the government is planning to adjust because this is going to lower government revenue," Sen said.

Sen pointed out that a public spending cut could be contractionary, which may not leave RBI with much room to crack down on inflation. The government, however, is looking at only a revenue spending cut, while productive capital spending remains the priority.

Sen said that states face a “hard budget constraint", which means if they cut the tax on fuel, they have no option but to cut expenditure as well. “That doesn’t really help," he added.

In a series of tweets, Sitharaman said the fuel tax cut on Saturday, as well as last November, was on a cess, and, hence, the loss due to the cut was entirely on the central government.

Former finance minister P. Chidambaram said in a tweet on Sunday that states are getting very little by way of a share of the Centre’s duties on petrol and diesel and that their revenue was from VAT on the two fuels. “I wonder if they can afford to give up that revenue unless the Centre devolved more funds or gave them more grants. The situation is like being between ‘the devil and the deep sea’," he said.

Tamil Nadu minister Thiaga Rajan said, “It is pertinent to point out that the Union had never consulted the states when they increased taxes on petrol and diesel multiple times. The exorbitant increase in taxes by the Union government has been only partially reduced through their cuts, and the taxes continue to be high as compared to the 2014 rates. Therefore, it is neither fair nor reasonable to expect states to reduce their prices," he said.

Although fuel prices declined on Sunday after the previous day’s duty cut, experts said a further decline in retail prices is unlikely as oil marketing companies are already reeling under high oil prices and under-recoveries.

Debasish Mishra, a partner at Deloitte, said that although the 10 per litre increase in diesel and petrol prices during March-April must have covered about $16-18 a barrel increase in crude prices, other factors such as rupee depreciation, accumulated under-recovery and elevated crack spreads must be adversely impacting margins of the oil marketing companies.

“The Indian basket of crude is hovering around $105 and $110 a barrel. Second, the rupee has depreciated to 78 (per dollar). All these taken together, there would still be some under-recovery," he said.

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