With restrictions imposed during the second wave of the pandemic easing, inflation should ease

Even as the country continues to grapple in the second wave of Covid-19, India’s Chief Economic Adviser Krishnamurthy Subramanian is “quite confident” that the central government will reach the fiscal deficit target set for this year on better-than-expected revenues.

The government has budgeted for a financial deficit of 6.8% of GDP in financial year 2022, although economists see a risk of slippage due to a recent resumption of food transfers. These transfers are estimated to cost the Treasury around 93,000 crore.

However, Subramanian believes that the goal can be achieved.

“We have to stick to the 6.8% target that we have set (determined) because the revenue situation looks much better,” Subramanian told BloombergQuint in an interview.

In the period April-May 2021, the government’s budget deficit was 1.23 lakh crore or 8.2% of the budget estimate. Last year, the budget deficit for the two months was 59.6% of the budget estimate. Higher tax revenues and non-tax revenues helped improve public finances in the first two months of the year.

The government’s net tax revenue of Rs 2.33 lakh crore collected during the first two months of fiscal policy was 15.1% of the budget estimate. Even in a pre-pandemic year like FY20 and FY19, net tax revenues collected in the April-June period were only about 6.8-6.9% of the budget target.

The government’s revenue position has been achieved through higher excise duty collections on fuel.

Central excise duty collections on oil products have risen nearly 1.5 times to Rs 3.45 lakh crore in the last three years, according to a written response from Rameshwar Teli, minister of state of the Ministry of Oil and Natural Gas, in Lok Sabha.

Given that inflation has risen above the central bank’s comfort band of 4 (+/- 2)%, economists and even the Reserve Bank of India have called for the supply side, including a rationalization of fuel taxes.
Subramanian countered this, saying that the weight of gasoline and diesel in the CPI basket is minimal.

As of Wednesday, the price of gasoline in Delhi was Rs 111.84 per. Liter, while the price of diesel was Rs 89.87. In Mumbai, petrol currently costs Rs 107.83, while diesel is at Rs 97.45, data available on the Indian Oil Corporation’s website shows.

According to Subramanian, with restrictions imposed during the second wave of the pandemic easing, inflation should ease.

“While inflationary pressures have been higher than 6% for two months, sequential momentum is moderate this month and core inflation appears to be down,” he said. “I expect inflation figures to actually be within the range. As the constraints fall, I think we should see total inflation be interval-bound.”

Further, Subramanian said he is not in favor of a job guarantee scheme in cities, as a number of economists have suggested.
Urban employment, as opposed to rural employment, is not seasonal, he argued. In addition, urban employment requires different qualifications, and designing a single wage rate is not easy.

“Finally, if you have to implement an urban work program, you will have to keep wages higher for urban areas than rural areas because the cost of living is higher, which will lead to more migration to urban areas and thus exacerbate the problem,” said Subramanian.