India has necessary fiscal space and foreign exchange reserves to face the adverse impact of high commodity prices on its economy due to the Russia-Ukraine war, finance secretary TV Somanathan told FE on Thursday. However, he refused to elaborate on the contingency plan being worked out to handle the emerging situation. If the crude oil and gas prices remain elevated for a longer period, the government may have to shell out more on fertiliser susbidy — the subsidy bill could be 50% more than the Budget estimate of Rs 1.05 lakh crore for FY23 — and possibly cut the taxes on auto fuels to keep retail fuel prices under check.
“There is some risk to the revenues as well as expenditure. A little bit of conservatism built into the FY23 Budget will help the government to deal with the emerging situation if any,” another official said. The Budget has factored in a nominal GDP growth of 11.1% for FY23, which analysts believe is an underestimate as inflation may drive up nominal GDP. Like in the pandemic-hit FY21 and FY22, the Centre might also cut down on spending by various departments and and redeploy the savings into priority areas, in the event of a revenue slide. “We don’t expect any major impact. The commodity price rise could be transitory due to sentiments. There is no indication of its persistence. Conflicts could be resolved suddenly too. There could be elevated oil prices for some months. It will challenge us because that would mean consumer price increase (for auto fuels) or excise duty challenge. We will face it,” the official said.
Absent these steps, there will be a serious threat to India’s current account. Also, inflation could rise to significantly higher levels, upsetting the RBI’s prognostication that the retail inflation will average at 4.5% in FY23 and impel it to change its accommodative policy stance and look at a rate hike sooner than imagined. That could hurt efforts to revive the economy. At a seven-month high of 6.01% in January, retail inflation had gone beyond the MPC’s tolerance band of 4+/-2% but it still stuck to status quo on rates in the latest policy review. By holding the retail fuel prices unchanged since early November, oil marketing companies have suffered significant under-recoveries.
Another official said, on condition of anonymity: “We are ready for any contingency. It is not something very alarming for India. Already oil prices were already high (when budget was presented). They will go up a little because of this conflict. The sanctions applied by US and Europe are not targeting Russian oil companies. The operating Russian pipelines are still allowed to function by Germany. They have only closed the non-operating pipelines.”
Sources in the government also reckon that the Ukraine crisis might lead to exploitation of more shell oil and shell gas by the US . Also, it may lead to quicker resolution of Iran situation which may ease oil supplies from that country. These sources, however, noted the withdrawal of liquidity by US Fed and other central banks might help cool commodity prices, which could mitigate the adverse effect of the unfolding scenario on India’s macroeconomic indicators.
The latest rise in bond yield is temporary and it may revert to the 6.70% level in the next few days, said Madan Sabnavis, chief economist at Bank of Baroda.
So, it is unlikely to prompt the Centre to reduce its gross market borrowing programme for FY23, as the RBI will bring in measures to keep yields stable.
“But yes, in case the crisis gets elongated and goes beyond say April-May, the government could choose to borrow less and make a strong announcement on the same. However, in the past we have seen that such action does not come at the beginning of the year and is more likely towards the end of the year,” Sabnavis said. “Besides, the market has been pencilling in a repo rate hike and the government’s calculation as per the Budget does indicate an implicit increase in cost of funds for the year,” he added. The Centre has budgetted a larger-than-expected market borrowing of Rs 14.95 lakh crore for FY23, against Rs 10.47 lakh crore for FY22.
Aditi Nayar, chief economist at ICRA, said, “If the Indian crude averages $100 per barrel through FY23, the current account deficit could rise to 2.3-2.5% of GDP from an estimated 1.4% in FY22.” Nayar said inflation is unlikely to moderate as sharply as the monetary policy committee (MPC) has projected, adding that rate hikes will be warranted by the second half of 2022. “The tax revenue assumptions made in the Budget for FY23 are mildly conservative, and may permit an early reduction in excise duty to absorb a portion of the shock related to higher crude oil prices,” she said.
DK Pant, chief economist at India Ratings, said if the Russia-Ukraine crisis stretches for a longer duration, it will not only impact the Indian economy but also weigh on fragile global growth. “The burden of high oil and gas prices is more likely to be shared by producers of oil and fertiliser, consumers and the government. The distribution of the burden shared by three economic agents will have differential impact on the economy,” he said. It will impact bond yields and capital flight to safety will take place, he added.
