Finance Minister Arun Jaitley returned to North Block, headquarters of the finance ministry, on August 23, after a gap of about three months when he was recovering from a major surgery. In the life of a government, three months may be a short period of time. But for Jaitley, three months should appear quite long as the macroeconomic fundamentals of the Indian economy underwent significant changes in this period, posing new challenges and a few opportunities as well.
Oil prices (Indian basket) were ruling at around $70 a barrel at the end of April. Today, they are higher by about six per cent, hovering at close to $74 a barrel. The exchange rate of the Indian rupee has depreciated by over four per cent in the last three months — slipping from Rs 68 a dollar in May to Rs 71 now.
Exports had begun picking up by May. They continue to grow, but now imports have also begun rising faster, as a result of which the trade deficit in July widened to a five-year high of $18 billion. According to some estimates, the current account deficit this year could even touch the three per cent mark, up from 1.9 per cent of gross domestic product (GDP) in 2017-18.
All these areas will pose difficult policy choices for Jaitley. He will be under pressure to prevent any further depreciation of the rupee against the dollar and raise duties on imports. Succumbing to such pressure will be counterproductive, creating deeper problems for the economy. Neither a stronger rupee nor protectionist measures can revive India’s exports or bolster its balance of payments.
Keeping in mind Indian exports’ import intensity and the damage, such steps can cause domestic manufacturing, the government must resist the temptation to raise import duties. While the depreciation of the rupee will help exports, Jaitley must also ensure that this is managed without causing volatility in the market and adequate steps are simultaneously taken to improve exports infrastructure in the country.
On the oil front, Jaitley’s options will be even more limited, with the Iran supply disruptions adding to the uncertainty. This is an election year. Elevated crude oil prices can increase the government’s subsidy burden on account of fertilisers and petroleum products and widen the fiscal deficit, if their retail prices are not allowed to rise in the face of electoral compulsions. Four major state assembly elections are to be held in the latter half of this financial year, followed by the general elections.
There will also be pressure on the finance minister to reduce excise duty on petrol and diesel to soften the impact of higher crude oil prices. A reduction in excise duty of Re 1 per litre of petrol and diesel sets back the government’s revenues by at least Rs 260 billion. Any duty cut will make Jaitley’s task to adhere to the fiscal deficit target of 3.3 per cent of GDP more difficult.
Disinvestment proceeds and non-tax revenue from dividends and profit will also pose similar challenges. By the end of July, the government could collect only Rs 92 billion from disinvestment of government equity in public sector undertakings (PSU), against the annual target of Rs 800 billion. With Air India privatisation on the back burner, the government may face a shortfall in that target. With many PSUs not doing well and even SAIL declaring that it would not pay any dividend this year, the target of collecting Rs 1.07 trillion from dividends and profits may be difficult.
The only good news on the fiscal consolidation front comes from the goods and services tax (GST) regime. And not because of collections, whose growth is still patchy. The reason why the GST will help Jaitley meet his revenue target is an amendment to the law that governs the GST compensation cess.
Early last month, the government got the specific law on GST compensation cess amended to allow the exchequer to keep the surplus collections in the Consolidated Fund of India and use them during the current year itself, after sharing them with the states on a 50:50 basis. The earlier law had mandated that the surplus of compensation cess should be kept in the public account and should not be used before 2022. In other words, the Centre and the states can now use the surplus cess during 2018-19, instead of waiting till 2022.
This is a bonanza for Jaitley. GST data from July 2017 to May 2018 shows that almost 40 per cent of the collected cess is surplus. Total GST compensation cess to be collected from July 2017 to March 2019 is estimated at Rs 1.51 trillion, thereby leaving an estimated Rs 600 billion surplus for the Centre and states to share during the current year. In other words, Jaitley will enjoy a cushion of Rs 300 billion, instead of worrying about a GST shortfall.