Government will continue to use fiscal measures to reduce fuel price volatility

The Center managed to maintain tight control over its financial position in the June quarter of fiscal year 27, keeping the budget deficit at 18.2 percent of the full-year target. This occurred despite serious disruptions and rising commodity prices caused by the war in the Middle East.

According to data published by the Comptroller and Auditor General (CGA) on Friday, the budget deficit increased by 9.6 percent during the quarter, reaching 3.1 trillion rupees. In the same quarter last year, the Center utilized 17.9 percent of the total full-year budget deficit target.

Government spending on major subsidies rose by 37.4 percent, amounting to 1.15 trillion rupees for the April-June period. This increase is attributed to a sharp rise in fertilizer subsidies by almost 58 percent. As a result, the Center used about 28 percent of the total allocated major subsidies, compared to 22 percent in the same quarter the previous year. The Middle East crisis and the subsequent rise in oil prices led to a significant increase in fertilizer prices in the June quarter.

Nevertheless, the government maintained a strong pace of capital expenditure, which jumped by almost 24 percent, reaching 3.40 trillion rupees in April-June. The Center achieved 27.8 percent of its annual capital expenditure (capex) target, higher than the 24.5 percent recorded in the corresponding quarter last year.

Madan Sabnavis, chief economist at Bank of Baroda, noted that revenue account expenditures could increase depending on the development of the war and crude oil behavior; provided capex is maintained, this could put pressure on the budget deficit ratio, potentially leading to a reduction of 0.3–0.4 percent of GDP. However, higher GDP growth would provide a statistical safety cushion.

The limited expansion of the budget deficit in the first quarter is also linked to the fact that the Center made only one tax distribution payment to states in June, whereas it was two tranches in June last year, which artificially inflated net tax revenue for April-June. The Center's net tax revenue in the first quarter reached 6.37 trillion rupees, an 18 percent increase compared to last year. On the other hand, tax distribution to states slightly decreased by more than 19 percent, amounting to 2.63 trillion rupees in the first quarter.

The central government transfers funds as tax distributions to states in 14 tranches per year and usually uses its own discretion to select months for double disbursement. Gross tax receipts remained sluggish, increasing by only 4 percent to 9.01 trillion rupees in April-June, as corporate tax collection rose by almost 20 percent, while excise duty collection fell by 22 percent, reflecting the reduction in the special additional excise on petrol and diesel at the end of March.

Non-tax government revenues increased only slightly to 3.78 trillion rupees in April-June compared to 3.73 trillion rupees for the corresponding period last year. For April-June, the Center's total receipts grew by 11.5 percent year-on-year, reaching 10.49 trillion rupees, including 10.14 trillion rupees in revenues, which is 11 percent higher year-on-year. Total government expenditures increased by 11 percent to 13.57 trillion rupees in April-June, including 10.17 trillion rupees in revenue expenditures, which is slightly more than 7 percent higher year-on-year.

Aditi Nayar, chief economist at ICRA, stated that they currently estimate the net impact of the Middle East conflict on the government budget at approximately 1.25 trillion rupees, or 0.2 percent of GDP, based on an average oil price of $80–$85 per barrel in fiscal year 27. She added that this impact could be offset by cost savings, which ranged from 1.8 trillion to 2.6 trillion rupees between the 2018 and 2025 fiscal years, suggesting that loans in October-March may not require an increase.