India experiencing a dual deficit crisis due to commodity prices and subsidies: Finance Ministry

21 Jun 2022 , 08:27 AM

The finance ministry warned on Monday that the economy’s dual deficit problem could resurface, with increasing commodity prices and rising subsidy burdens leading to an increase in both the fiscal and current account deficits. It’s also the first time the government has spoken openly about the prospect of fiscal slippage this fiscal year.

The finance ministry said in its latest Monthly Economic Review, “As a result of the reduction in excise charges on diesel and gasoline, there is an upside risk to the anticipated amount of gross fiscal deficit.” “An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effects of higher import costs, and weaken the rupee, further aggravating external imbalances, creating the risk (admittedly low at this time) of a cycle of wider deficits and a weaker currency.”

According to the report, reducing non-capex spending is crucial not only for maintaining growth-friendly capex but also for avoiding fiscal slippages. Because of a global supply constraint caused by the Ukraine conflict, the ministry had stated that India’s fertilizer subsidy expenditure for FY23 could jump to roughly Rs2.5 trillion, compared to the Budget Estimate of Rs1.05 trillion.

Apart from the already announced Rs1.10 trillion increase in fertilizer subsidies, the Narendra Modi government’s decision to extend the PM Garib Kalyan Anna Yojana (PMGKAY) until September will push the food subsidy outlay for FY23 to Rs2.87 trillion, up from Rs2.07 trillion in the Budget Estimate.