If prices are down and inflation is under control, the Reserve Bank will have to think of cutting interest rates in its next monetary policy.
The government has to do some serious arithmetical acrobatics if it has to meet its fiscal deficit target of 3.3 per cent of GDP for 2018-19. Its revenues have been hit by lower collections from the Goods and Services Tax and a fall in indirect tax collection. The latter is estimated at a massive Rs 90,000 crores and includes the cut on petroleum products by Rs 1.50 per litre in October, while the collections from GST was a mere Rs 3.46 lakh crores if the tax proceeds from states and other sources like the Integrated Goods and Service Tax, estimated at Rs 7.44 lakh crores, are excluded. It is estimated that a drop of $10 a barrel in the crude oil price brings India’s current account deficit down by $15 billion and the fiscal deficit lower by 0.1 per cent. It also has a snowballing effect on the consumer price index and wholesale price index. If prices are down and inflation is under control, the Reserve Bank will have to think of cutting interest rates in its next monetary policy. This would be music to the ears of industry as lower interest rates will help spur growth. However, the government took a Rs 20,000-crore hit after it cut oil prices by Rs 1.50 in October.
On the other hand, its expenditures are high, not the least being the higher minimum support prices it has declared for the kharif season along with a profit. It cannot afford to offend farmers by going back on the promise. Rural unrest is growing, and in Maharashtra farmers have been organising long marches to raise pressure on the government to meet their demands.
The silver lining in this scenario is that crude prices are at an all-time low and the government could save on the oil subsidy it gives to oil marketing companies. The government’s oil subsidy bill is Rs 25,000 crores and its full year import bill is $125 billion.
While some are betting that the government will miss its fiscal deficit target, the government is determined to maintain the target, and with political will this can be accomplished. Besides squandering precious fiscal resources on building the largest statue in the world, it has the option of deferring some schemes. It can also ask public sector corporations to shell out higher dividends. It will probably have better luck with PSUs than it had with the Reserve Bank of India. Of course, it’s like one arm of the government transferring funds to another since the government is the largest single shareholder in PSUs. It may be recalled that early this month the government had wanted to dip into the surplus reserves of the RBI, and it led to a public skirmish between the RBI governor and the Centre.