In what may be joining the dots with the earlier measures in response to the re-emergence of the twin deficit, along with high inflation, rising rates, and fast-declining forex reserves, the government of India (GoI) this week announced two more measures.
First, it hiked the export duty on petrol/ATF (INR 6/ltr), diesel (INR 13/ltr) and on crude (INR 23,250/ton). Second, from now on gold imports will attract higher custom duty (15% vs. 10.75% earlier).
Earlier, a ban was imposed on wheat exports and a 15% export duty on steel in an attempt to temper domestic inflation.
In addition, excise duty on petro products was reduced, translating into forgone tax revenue and fertilizer and food subsidies were scaled up. They together are estimated to widen the fiscal gap by an additional Rs 3 trillion.
We estimate further burden from under-recovery of oil companies, and higher interest costs on public debt would mean a potential total slippage of Rs 4.6 trillion or 1.8% of GDP.
GST collections have been robust (Rs 1.45 trillion in June 2022) clocking above Rs 1.4 trillion for the 5th consecutive month. But this is only marginally higher than the centre's budgeted target of Rs 7.8 trillion collections for FY23E or a budgeted monthly run rate of Rs 1.3 trillion.
Thus, it is getting clearer that not only the monetary policy conduct but also the fiscal management is getting challenging.
RBI is faced with a potential sharper depreciation in the rupee and an additional drain of $40-50 billion from the forex reserves balance, which at $590 billion is already down $52 billion from last year’s peak.
The imposition of import duty on gold imports is an attempt to narrow the current account deficit gap, which is projected to rise to 3.3% of GDP in FY23E assuming crude at $100/bbl; with crude at $110-120, the risk is on the higher side.
This could be larger than the projected funding through capital account balance/GDP at 1.5-2% in FY23E.
Read more at: https://economictimes.indiatimes.com/markets/stocks/news/is-india-back-to-managing-macro-stability/articleshow/92618252.cms