A fresh strain is building on India's economy. A swelling import bill on one side, and a steadily weakening rupee paired with enormous subsidy outgo on the other, are together unsettling the government's budget arithmetic. The upshot is that keeping the fiscal deficit within its planned limit has become far harder than it once looked.
The Deficit Is Set to Overshoot
Bloomberg, citing a senior official, has reported that the government is gearing up for a budget deficit considerably larger than first estimated. Pointing to the same report, news agency Reuters has noted that India — the world's third-largest importer and consumer of oil — is ready to let its fiscal deficit climb to 4.8% against the 4.3% target for this financial year. The gap relates to the fiscal year that began on April 1. In the last budget, the government had aimed to bring the deficit down to 4.3% of GDP, but that figure may now be revised up to 4.8%.
The Root Cause: Iran's War and Costlier Oil
The real trigger lies overseas. The war in Iran has pushed up the cost of fuel subsidies, and that has weighed directly on the government's finances. Crude oil prices rose, and the supply disruption that followed the closure of the Strait of Hormuz hit India too. That is precisely why state-owned retailers had to raise petrol and diesel prices by roughly 8%. On top of that, the government has trimmed the subsidy on domestic cooking gas cylinders.
India's vulnerability shows up clearly here — the country imports close to 90% of the oil it needs. For that reason, India is counted among the nations likely to be hit hardest by any prolonged disruption to global energy supplies stemming from the Iran war.
Fertiliser Subsidy May Jump 20% Too
The pressure is not confined to fuel. A government official has already indicated that the fertiliser subsidy could rise by 20% this financial year. For now, the government is keeping all options open and has decided to take a fresh look at the overall fiscal picture later in the year, once non-tax revenue and actual subsidy requirements become clearer.
Spending Cuts on the Table
To rein in the deficit, the government is not relying on revenue alone. It is also weighing options to cut spending across ministries. In other words, if needed, trimming government expenditure is another lever it can pull to keep the deficit in check.
