New Delhi: A series of external factors are posing grave challenges to the government’s management of the economy in the run-up to the 2019 general election.
A depreciating rupee, surging crude oil prices, expanding current account deficit and an unfolding global trade war are forcing the Narenda Modi-led government to take populist measures, despite pledges not to do so.
Further, tax cuts by the US administration, which prompted American firms to repatriate profits from overseas arms, besides the US Federal Reserve’s decision to withdraw accommodating monetary policy, suggest the worst is not over. In fact, finance minister Arun Jaitley was forced to take more steps recently to deal with the challenges and on Saturday promised further measures if necessary. Mint takes a look at how India is responding to the external pressures.
Rupee and tariffs
Over the last month, the government and the Reserve Bank of India (RBI) have taken steps to ease rules on foreign borrowings and masala bonds to stabilize the rupee and to rein in the current account deficit (CAD). New Delhi’s imposition of import duty on 26 September on non-essential items worth ₹86,000 crore a year comes at a time when global trade is vitiated by protectionism and US President Donald Trump referring to India as the “tariff king.” Despite these steps, the rupee closed trading at an all-time low of 74.39 on Tuesday. Tepid global demand affecting India’s exports and foreign investment outflows are likely to exert further pressure on the CAD, which has been expanding for the past few quarters and was at 2.4% in the June quarter. Economists expect it to be around 3% of gross domestic product (GDP) in 2018-19.
Compromise on fuel retailers’ pricing freedom
Last Thursday, the government effected a ₹2.5 per litre cut in petrol and diesel prices, by cutting excise duty and asking state-run fuel retailers to take a hit of ₹1 on every litre of auto fuel sold. The centre’s directive asking oil marketing companies (OMCs) to sell auto fuel below global market price by ₹1 can be interpreted as state interference in regulating fuel prices, which is a marked deviation from its subsidy reform credentials. To be sure, the cut of ₹1 per litre by state-run fuel retailers does not distort the fuel retailing market as the “under-realisation” of full market price is not compensated by the centre.
Compensating state retailers for under-realization would have given them an unfair edge over private retailers such as Reliance and Nayara Energy. “Fuel price deregulation stays. This is a one-off kind of gesture. Given the circumstances, it is a gesture of goodwill from the government and companies, signalling that we are with the consumers,” said an executive of a state-run retailer, requesting anonymity. Deregulation of petrol prices in June 2010 and diesel prices in October 2014, thereby doing away with the practice of subsidising state-run retailers, led to the growth of private sector OMCs.
Fiscal deficit
Prime Minister Modi benefitted from low crude oil prices for most of his term, which helped him cut indirect taxes on non-fuel items and launch several welfare schemes. Last week’s excise duty cut on auto fuel will cost the exchequer ₹10,500 crore for the rest of the fiscal. Moody’s Investors Service said this will raise India’s fiscal deficit to 3.4% of GDP, against the budgeted 3.3%.