The Narendra Modi Government will face its first litmus test when it presents its maiden Budget next month.
Amid a spate of challenges including a not-so-encouraging economic growth rate, spiraling inflation and rising subsidies, the government will have to do a tight-rope walk to raise money for welfare schemes and yet, rationalise expenditure.
Staring in its face is inflation, which touched a five-month high of 6.01 per cent in May propelled by food inflation that stood at 9.50 per cent.
To tame inflation the Reserve Bank of India (RBI) did come to the rescue by raising key policy rates thrice since September, 2013. But that squeezed consumers ability to borrow, while rising food prices curtailed their ability to spend. Together, it had a spiral affect on the economy.
Besides, subdued investment inflows on account of policy paralysis over the past several quarters weakened economic growth, which grew marginally to 4.7 per cent in 2013-14 from 4.6 a year ago. This is the second straight year when the Indian economy registered a below 5 per cent growth.
One of the primary components that proved to be a drag on the economy includes subsidies for fuel, food security and fertilisers aggregating to a whooping `3.32 lakh crore.
The crisis in Iraq is likely to increase our fuel subsidy, which stood at about `1,40,000 crore in FY14.
India, the world’s fourth largest oil importer, gets 13 per cent of imported oil from Iraq and if the crisis continues, analysts anticipate crude oil prices to shoot up from the current $113.48 per barrel to $120. This could potentially increase our oil bill by `20,000 crore and oil subsidies will likely follow suit.
“The recent spike in crude oil prices has once again led to volatility in the Indian currency. However, we strongly feel that the rate will soon stabilise,” says Debopam Chaudhuri, Chief Economist, ZyFin Research.
HSBC estimates that a $10 per barrel increase in the price of crude oil pushes up wholesale inflation by a full percentage point over a 12-month period.
Besides, oil, food security (`1,24,000 crore) and fertiliser subsidy totalling `67,970 crore and schemes like MGNREGA with an annual spend of `41,000 crore are a huge cause of concern.
Worried about the rising subsidies, the World Bank asked the government to reduce the same. “Iraq is a big concern and extremely unpredictable. India, being an energy deficient country, could be faced with increased fiscal pressures on the fuel side. There is a need to relook fuel subsidies and see who all benefit from this subsidy,” says Onno Ruhl, country director India, World Bank.
As if it’s not enough, EL Nino and the prospects of a poor monsoon thereby are also worrisome.
El Nino, which refers to warmer-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean, will likely keep CPI inflation at elevatyed level of 8-10 per cent in the second half of 2014 and will pose a 50-70 basis point risk to this fiscal’s growth expectation.
“If rains are normal, CPI inflation should drop to 7-7.5 per cent by March, 2015. If the El Nino impacts the kharif harvest, rising food prices could push up CPI inflation to 8-10 per cent, essentially irrespective of monetary policy action,” BoA-ML said adding that El Nino poses a 50-75 basis points risk to its 5.4 per cent FY14 growth forecast.
India is likely to produce 264.38 million tonnes of food grains during 2013-14 (includes kharif 2013 and rabi 2013-14 crops), according to official estimates. As of May 1, the government has over 67 million tonnes of food grain stock, of which wheat was around 34 million tonnes.
But if the buffer stocks will be sufficient to feed the country’s 1.25 billion population remains to be seen.
But at the same time to give the economy a semblance of order, infrastructure ministries including Road Transport Highways and Shipping, Power and Coal, and the ministry of Environment will need to work as unit and in a seamless fashion as these are the sectors that have the potential to kick-start the economy.
