Oil, MSP may derail fiscal deficit plans

financial chronicle

Business, Economy

Niti Aayog estimates, the cost of 1.5 times MSP for 24 crops could be around Rs 1.15 lakh crore.

Crude oil settling at $75-80 could also affect economic growth and push up fiscal deficits beyond 3.3 per cent.

New Delhi: Just two months into the current financial year, the fiscal situation is already looking shaky for the government. Private investment is still not picking up yet and high oil prices are dragging the economy towards a lower side of growth estimate. Add to this expenditure on account of higher MSP for crops and the sugarcane arrears to farmers.

All this can play havoc with the 3.3 per cent fiscal deficit target. Official sources said that higher oil prices could limit growth to lower end of 7-7.5 per cent forecast.

The higher MSP cost promised in the budget will add to the fiscal pressure as the cost of 1.5 times more than the MSPs of 24 crops is going to weigh heavily on the government.

According to Niti Aayog estimates, the cost of 1.5 times MSP for 24 crops could be around Rs 1.15 lakh crore. The high crude prices have pushed up inflation. The CPI inflation was 4.6 per cent in April 2018 but has remained within the RBI's upper band of 6 per cent.

With crude expected to settle at $75-80 a barrel, the surge in inflation could touch 5.1 per cent in the Q1 of the current fiscal. HSBC recently said the 7.7 per cent growth achieved in the last quarter of previous fiscal is led by public spending and there is no private investment and consumption surge in it.

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The worrisome aspect is the slowing of private consumption, the main growth engine. The share of private consumption expenditure in GDP was lower at 54.6 per cent in Q4 against 59.3 per cent in the previous quarter of the last fiscal.

The government consumption has been the prime driver and given the limited ability of the government to spur growth without breaching the reduced fiscal deficit target of 3.3 per cent for 2018-19, private consumption and investment have to pick up higher than the GDP growth rate this fiscal for this momentum to sustain and all these now look difficult with high crude prices and expenditures staring at the government on account of high MSP, sources said.

Crude oil settling at $75-80 could also affect the economic growth and push up the fiscal deficits beyond 3.3 per cent. Rating agency Moody’s has already trimmed its India growth forecast to 7.3 per cent for calendar year 2018 from a previous projection of 7.5per cent, citing higher oil prices and tighter financial conditions.

Some other finance ministry officials, however, said everything depends on the numbers. “We will have to handle these numbers only during the RE (revised estimates) meetings. When we talk of high crude prices affecting adversely on the imports side, there is also positive impact on the revenue side. There will be a buoyancy on the non-tax side also. It is not a one-way .Our cost estimates are dependent on a particular value of the dollar, similarly on the non-tax side also it is assumed at a particular level,” said an official.

“As much as there is a push factor for cost, there is also a pull factor for non-tax revenue. So, we cannot just say that this will perforce a negative impact on the fiscal. And if at all there is any need for fiscal deficit revision, it will be decided in the RE meeting in October. And by then the oil prices could have been subsided from the current position,” he added.

Fiscal deficit in the first month of the current financial year touched 24.3 per cent of the budget estimates on account of higher revenue and lower expenditure.

Fiscal deficit is the difference between total revenue and expenditure.

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