A tale of 2 deficits for India: fiscal bhi, current account bhi

In a recent interview, the Finance Minister Nirmala Sitharaman, has cautioned about the re-mergence, of the twin deficits at the same time. Indian economy could be getting into a situation wherein the fiscal deficit would be high and so would be the current account deficit. Now fiscal deficit is the budget deficit or the budget funding shortfall. On the other hand, the current account deficit is the trade deficit plus the overall shortfall in the current account including services and remittances during a particular period. 

But why is the government expecting the twin deficit problem to come back. On the one hand, there are rising commodity prices which will lead to a spike in the current account deficit as the trade deficit worsens. On the other hand, as the government adds to its subsidy burden it will spike the fiscal deficit. In the current year, the government expects a sharper than expected spike in the food grain subsidy as well as the fertilizer subsidy. In addition, the fiscal inflation fight by cutting duties will also impact the revenue flows.

Let us sum up the situation. The government revenues are likely to take a hit following cuts in excise duties on diesel and petrol. In addition, it is also likely to lose revenues on cuts in import duties on a host of items like coking coal, ferrochrome, edible oils etc. All this is likely to negatively impact the revenues and consequently the fiscal deficit. With India relying on imports to meet 85% of its daily oil requirements, the imports are all set to become costlier and imported inflation will result in a spike in the current account deficit.

To add to the problem on visible goods, there is also a worry on the services front. India’s service exports are dominated by the IT industry and that could face headwinds in the form of lower IT spending in the year. This could be an outcome of recession or even expected recession; which will force a number of global corporates to cut down on their IT outlay and cut overall spending too. While the government has been trying its best to avoid fiscal slippages, there is always a problem when fiscal deficit is already at 6.9% and worsening.
 

Some of the subsidy numbers are quite revealing. For instance, the fertiliser subsidy bill for FY23 could increase to around from Rs1.05 trillion to a whopping Rs.2.50 trillion. This is due to the shortages caused by the Ukraine war. In addition, the government also plans to extend the PM Garib Kalyan Anna Yojana (PMGKAY) until September 2022. This alone will entail enhancement in the food subsidy bill from Rs.2.07 trillion to Rs.2.87 trillion in FY23.

Many of these expenses really cannot be done away with. In terms of revenue impact, the cuts in excise duty on petrol and diesel has been pegged at around Rs85,000 crore for FY23 while the revenue foregone on steel and the additional impact of subsidized gas cylinders will cost another Rs22,000 crore. These things could get much worse if there is a recession in the global economy and in the case of India, the impact would be flat even if it experiences stagflation. Government has to do a tightrope walk balancing the needs of maintaining growth momentum and restraining inflation and deficits.

However, the Finance Ministry continues to remain extremely positive about the medium-term growth prospects of the Indian economy. There have been positive signals emerging in the form of robust GST collections, surge in e-way bills, boost to capacity utilization by nearly 600 bps to 71% etc. The real challenge for the finance ministry would be to manage the near-term challenges. The challenge is that the growth levers have to be kept well-oiled without forsaking consumer prices or fiscal responsibility at any point of time.