Government Walks Tightrope Between Inflation And Wider Fiscal Deficit
The inflation impact of the government-announced measures could be about 50 basis points. Fiscal deficit seen rising to 6.8-6.9%.
Steps announced by the government over the weekend, including a cut in excise duties on fuel and a higher provision for subsidies on fertilisers, could ease the pain of inflation a touch. But it will also mean a wider fiscal deficit and push up bond yields, economists said.
Excise duties on petrol and diesel have been cut by Rs 8/litre and Rs 6/litre, respectively. The central government will also extend a subsidy of Rs 200 per LPG cylinder (up to 12 units) to more than 9 crore beneficiaries of the Pradhan Mantri Ujjwala Yojana. An additional amount of Rs 1.10 lakh crore is being set aside for fertiliser subsidy.
Here's how economists expect the steps to impact inflation and the fiscal deficit.
Pranjul Bhandari, chief India economist, HSBC
The excise duty cuts will lead to a 7-8.5% fall in prices and lower CPI inflation directly by 0.2 percentage points. The direct plus indirect fall in inflation, together, could be around 0.5 percentage points. But this will also cost the exchequer 0.4% of GDP in terms of lower tax revenue.
The subsidy on LPG cylinders is likely to cost the exchequer 0.02% of GDP.
The additional fertiliser subsidy is likely to cost the exchequer 0.4% of GDP in addition to the 0.4% of GDP already budgeted for FY23.
While the import and export duty changes will help in inflation control, we remain a bit cautious about the immediate quantum of relief given the rising pricing power of large firms. There may be some downward stickiness in prices.
Overall fiscal slippage could be 0.2% of GDP but the rise in the fiscal deficit in rupee terms could be high at around Rs 1.5 lakh crore more than budgeted, if no other expenditure cuts are made.
This will only partly address the ongoing inflation problem, and headline CPI will still likely average well above the RBI’s 6% upper tolerance limit in FY23.Pranjul Bhandari, Chief India Economist, HSBC
Rahul Bajoria, Chief India Economist, Barclays
The tax cuts on motor fuels are likely to cost the exchequer at least Rs 1 lakh crore.
The LPG scheme is likely to see only a partial uptake, given the average refills stands at 3.662 per beneficiary per year. That means the subsidy burden should remain closer to the Rs 61,000 crore estimated by the government.
The government had earlier announced the extension of its free food distribution scheme, which could cost Rs 1.5 lakh crore. In addition, we see a higher fiscal expenditure on fertiliser subsidies.
The government is also likely to see a shortfall of Rs 35,000 crore from a smaller central-bank dividend this fiscal.
However, stronger growth and conservative budgetary estimates means the government could see a revenue upside of at least Rs 1 lakh crore. We also envisage the government cutting capital expenditure by Rs 1.0 lakh crore this year.
As a result, the overall fiscal deficit is likely to still exceed budgetary estimates by Rs 2.0 lakh crore which would mean a shortfall for FY22-23 to 6.9% of GDP from the budgetary estimate of 6.4% GDP.Rahul Bajoria, Chief India Economist, Barclays
QuantEco Research
While it is difficult to ascribe an exact impact on inflation for each of the measures, the reduction in petrol and diesel excise could offer close to 50 basis point of impact on headline CPI inflation.
This will be important to lower inflation expectations, at a time both food and fuel price pressures have exacerbated.
Notwithstanding the excise cut, we continue to hold on to our FY23 CPI inflation expectation of 6.1-6.3%, but with risks evenly balanced now (versus upside risks earlier).
The reduction in duties on raw materials will offer comfort to producers in steel and plastics industry.
With an upside risk to the fiscal deficit target of 6.4% for FY23, we now see 10-year yield moving higher towards 7.75-8.00% range before the end of FY23.