The government is weighing spending cuts across parts of the budget as higher oil prices inflate subsidy bills and threaten to derail its fiscal consolidation plans, according to a Bloomberg report.
The options have been reviewed in meetings with finance minister Nirmala Sitharaman over the past month, although no decision has yet been made, said officials familiar with the matter.
There’s little appetite to reduce the budget on capital expenditure or defence, they said. Officials are instead reviewing other areas where spending could be trimmed, such as allocations for water resources and loans to states.
Prime Minister Narendra Modi’s government is facing mounting economic challenges as the West Asia conflict drags on. Oil import bills have surged, the currency has plunged to a record low, and inflation threatens to exceed the central bank’s 4 per cent target.
Economists warn that elevated oil prices could jeopardise the government’s goal of narrowing the fiscal deficit to 4.3 per cent of gross domestic product in the year ending March 2027, potentially resulting in the first fiscal slippage since the pandemic.
Data last week showed the fiscal deficit nearly doubled from a year earlier to ₹3.6 trillion ($37.8 billion) in April, the first month of the financial year, as spending far outpaced revenue receipts.
A widening budget deficit would require the government to raise revenue elsewhere or borrow more. The government is wary of increasing borrowing beyond budgeted levels because additional debt issuance could push bond yields higher, officials familiar with the matter said.
India has budgeted ₹1.71 trillion for fertiliser subsidies this fiscal year, but officials estimate the bill could almost double if global energy prices remain elevated. At the same time, a smaller-than-expected dividend payout from the central bank has left the government with limited fiscal buffers to absorb the additional costs.
Any decision to prune spending could be politically tough for Modi as it risks hurting the government’s key welfare programmes for rural areas. Reducing funds to states could also turn into a political flashpoint. Many opposition-ruled states in the south have previously raised concerns over what they say is the unfair sharing of tax revenue.