Excise Duty Cuts On Fuel Poses Risk To Fiscal Deficit: Finance Ministry

India faces near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in 
inflation and containing the current account deficit while maintaining a fair value of the Indian currency, the monthly economic review released by Finance Ministry on Monday, said. 

Government revenues have taken a hit following cuts in excise duties on diesel and petrol, posing risk to budget level of gross fiscal deficit, the report said, adding that that this, in the long run could impact the currency. 

"Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances, creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency," the monthly report said.

It also noted that near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability.

The imported components of high retail inflation in India have mainly been elevated global prices of crude and edible oil. Locally, the onset of the summer heat wave has also contributed to the rise in food prices, it added. 

"However, going forward, international crude prices may be tempered as global growth weakens and the Organisation of Petroleum Exporting Countries (OPEC) increases supply. But, the timing of 
this remains uncertain and there are also upside risks to oil prices as OPEC supply will not be enough to match the shortfall caused by potential withdrawal of Russian crude from the market," the report observed. 

Finally, as summer heat wave gradually gives in to expected timely arrival of monsoon sending newer crops to the markets, food prices and consequently headline retail inflation are expected to decline, it said on an optimistic note.

Rationalising non-capital expenditure has thus become critical, not only for protecting growth supportive capital expenditure but also for avoiding fiscal slippages, it said.

"Depreciation risk to the rupee however still remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to increasing policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation," the report added.

Notably, the US central bank last week raised the key policy rates by a steep 75 basis points, against expectations of 50 basis points hike to address the multi-decadal high inflation in the country.

It is observed that inflation in advanced economies has been surging for over a year whereas in emerging market economies the surge has been a recent phenomenon.

In India, retail inflation has been over the Reserve Bank of India's upper tolerance band of 6 per cent for the fifth consecutive month in a row in May, while the Indian central bank projects that it would continue to remain high till the third quarter of the current financial year 2022-23, before moderating. Besides, domestic wholesale inflation has been in double-digit for over a year now.