India’s government will not be able to reduce its budget deficit in the current fiscal year as previously expected, officials said, but will seek to cap the deficit at last year’s level to avoid a major deterioration in finances. public.
Efforts to maintain some fiscal discipline reflect New Delhi’s concerns about risks to its sovereign credit rating, but will likely limit the government’s firepower to contain inflation and provide relief to households and businesses.
In February, Prime Minister Narendra Modi’s government set a budget deficit target of 6.4% of gross domestic product (GDP) for the year starting April 1, compared to a deficit of 6.7% last year. .
The sources said that if increased spending to fight inflation meant the government missed this year’s target, policymakers would seek to limit the gap to 30 basis points.
“We will try to contain the slide back to last year’s levels,” one of the officials, who did not wish to be named, told Reuters.
Soaring costs forced India in May to cut fuel taxes and change duty structures, which slumped revenues by around $19.16 billion, while additional fertilizer subsidies increased spending.
India’s government and central bank struggled to contain prices through fiscal measures and monetary tightening after inflation hit multi-year highs.
Retail price inflation has held above the Reserve Bank of India’s 6% cap for five consecutive months, while wholesale price inflation has hit 30-year highs.
The Indian government is wary of the risks that fiscal slippage poses to its sovereign credit rating. Its debt-to-GDP ratio, which currently stands at around 95%, is well above the 60-70% levels for other similarly rated economies.
This leaves little room for the government to provide additional relief, as the May measures are already expected to push the deficit up more than 30 basis points if revenue collection fails to exceed the fiscal target.
“The government can certainly do more, but at what cost? If more action is taken, it will require additional borrowing from the market, which will drive up yields and eventually cause inflation to rise,” said a woman. second source familiar with the discussions.
The government is reluctant to expand its record Rs 14.31 trillion market program in the current financial year, the two officials said, adding that a decision on additional borrowing requirements would only be taken in November.
India’s finance ministry did not immediately respond to requests for comment.
The first official said fertilizer subsidy bills could rise by 500-700 billion rupees from the current estimate of 2.15 trillion rupees. High crude oil prices also added to the challenges as the scope for tax cuts was limited.
“We are aware that we may need to prepare for more measures, but that may mean cutting other growth-oriented spending,” he added.
The second official said that with little room for more central government action, state governments needed to do more to help control inflation.
Tax collection remains the “bright spot” and has given the government some leeway, the first official said.
From April to June 16, government direct tax collection increased by 45% year-on-year to Rs 3.4 trillion, while indirect tax collection in April-May increased by nearly 30%.
($1 = 78.3050 Indian rupees)