Reduction of excise duty on petrol and diesel has increased the risk to budgeted fiscal deficit, a Finance Ministry report said on Monday. It also advised rationalisation of non-capital expenditure.

The FY23 Budget estimated fiscal deficit at 6.4 per cent. However, last month, the government decided to cut part of excise duty levied on petrol and diesel. This reduction is estimated to bring down revenue collection by ₹1-lakh crore. At the same time, subsidy on fertiliser has been raised by ₹1.10-lakh crore to ₹2.15-lakh crore. All these are expected to have an effect on the fiscal deficit, indicated a monthly economic review (MER) prepared by the Economic Affairs Department of Finance Ministry.

Non-capex expenditure

“As government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged. Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weakening the value of rupee, thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency. Rationalising non-capex expenditure has thus become critical, not only for protecting growth supportive capex, but also for avoiding fiscal slippages,” MER said.

The budget prescribed an expenditure of over ₹39.44-lakh crore, out of which capital expenditure has been estimated at over ₹7.50-lakh crore, while the remaining ₹32-lakh crore is revenue expenditure.

Near-term challenges

According to the report, India faces near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit while maintaining a fair value of the Indian currency. “Many countries around the world, including and especially developed countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up,” the report said.

Further, it mentioned that India’s medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation for the rest of this decade. “Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability,” MER said.

In the medium term, the successful launch of the Production Linked Incentive (PLI) scheme, development of renewable sources of energy while diversifying import dependence on crude oil and strengthening of financial sector are expected to drive economic growth, the report said.

Balancing act

It acknowledged that the high-wire balancing act between maintaining growth momentum, restraining inflation, keeping the fiscal deficit within budget and ensuring a gradual evolution of the exchange rate in line with underlying external fundamentals of the economy is the challenge for policymaking this financial year.

“Successfully pulling it off will require prioritising macroeconomic stability over a near-term growth. The reward for such a policy discipline will be the availability of adequate domestic and foreign capital to finance India’s investment needs and economic growth that fulfil the employment and quality of life aspirations of millions of Indians,” the report said.

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