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The double whammy India faces—External crisis & fiscal strain

Highly dependent on central devolutions, vulnerable state budgets face a severe squeeze on critical capital expenditure.

With Prime Minister Narendra Modi outlining a series of austerity steps that Indians should take in the wake of the ongoing West Asian conflict, the Union and state governments must now plan strategies to manage the fiscal costs that higher crude oil prices will impose on their finances. India faces not just an external account problem, but an equally grave fiscal challenge.

Austerity measures, in whatever form, should conserve the country’s foreign exchange resources and help the government manage its external account. A widening current account deficit, along with capital outflows, will require concerted efforts by the Union government to bridge the balance of payments gap, which is certain to increase. The fiscal challenge, however, differs from a potential external account crisis, though the two are interrelated.

 In the last few days, the Union government has initiated steps such as allowing two rounds of increases in the retail prices of petrol, diesel and compressed natural gas (CNG). It has also sent directives to central ministries and public-sector enterprises, including state-controlled banks, on how to conserve foreign exchange. These measures should help oil companies recover some of the losses incurred since the sharp increase in crude oil import costs.

State governments have also announced austerity measures, but a couple of them have reduced taxes on aviation turbine fuel, which will impact their revenue. Most of them, however, are yet to take steps towards managing their expenditure or revenues. Clearly, states have not done enough to convince anyone that........

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