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Major challenges on two key fronts

Two areas of the economy are causing serious concern to the UPA Government and the planners. First, the subsidy burden from oil imports has become prohibitive with no net benefit for the economy from the rupee appreciation since November last. The saving in rupee cost of imports by an average 8.3 per cent this year could not offset the increase in dollar cost of oil imports. World crude prices had soared to around $78 a barrel at one stage. Even the current quotation of ar ound $72 a barrel is 20 per cent higher than the levels touched a few months back.

A stronger rupee has thus helped only to moderate the impact of the high cost of oil imports. Unless world oil prices come down below to $60 a barrel, the subsidy burden will become heavier.

The Finance Ministry has therefore indicated to the Ministry of Petroleum and Natural Gas the need to increase selling prices for gasoline and diesel oil.

But the Government is under political compulsion not to raise prices for LPG and kerosene sold through fair price shops.

The aggregate oil subsidy may range between Rs. 65,000 crore and Rs. 70,000 crore this year if there is no significant softening of crude prices.

While the Indo-U.S. nuclear agreement may take some time to become operational it is expected that the efforts to ensure energy security with rigorous exploitation of natural gas resources in the Krishna-Godavari and other river basins and the arrangements to carry gas through pipeline over long distances will temper the speculative activities of members of the OPEC and the international oil cartels. However, the integrated energy policy under formulation can have a favourable impact only over a period. In the medium term, the prohibitive dollar cost of oil imports will have to be managed with help from surging invisible receipts.

Despite a dearer rupee, the NASSCOM chairman has envisaged a rise in forex earnings of the IT sector by $10 billion to $60 billion this year. As invisible receipts from other segments of the service sector will also be higher despite increased cost to the foreigner, the current account deficit may not get enlarged. It is of course assumed that the target of $160 billion for all exports will still be realised. Even with a shortfall of $5 billion in this regard, there can be a balance of payments surplus thanks to the steady inflow of non-debt and debt forex resources, the former in particular.

However, the comfortable balance of payments position cannot prevent an increase in the country’s external indebtedness. To bring down foreign currency loans for meeting the rupee requirements of corporates, the RBI has recently stipulated that such loans will be allowed only to import capital goods and capital equipment and other items not available locally.

The uptrend in foreign exchange assets has been sustained judging by the anxiety of foreign institutional investors and other foreign Interests to take advantage of the assured long term outlook for the Indian economy. The prospect of a continued healthy external sector will not however help reduce the impact of new inflationary pressures arising from a fresh hike in prices for select petro-products to reduce the subsidy burden.

The total cost of oil subsidies in three years can be easily Rs. 1.50 lakh crore. Such a huge burden will have a debilitating effect on the finances of public sector oil enterprises even with reduction in various levies including State sales tax.

For minimizing the severity of the residual oil subsidy on the public sector enterprises, oil bonds also have been issued to PSEs concerned.

The total of oil bonds issued in 2005-07 comes to Rs. 35,621 crore with a corresponding increase in the internal debt of the Centre. Fresh bond issues may have to be made in 2007-08 for about Rs. 25,000 crore if last year’s procedure is adopted. In that event, the internal debt will rise by over Rs. 60,000 crore in three years.

It may be argued that the issue of bonds has not had a queering effect on the money market but many PSEs have sold these negotiable instruments to fund their rupee expenses.

It is difficult to foresee a satisfactory solution at this stage for this impasse, as fresh price hikes for petro-products may not be politically feasible. There will also be the threat of new inflationary pressures.

The second major area of concern for the Government is the compulsion to import large quantities of wheat, pulses and edible oils even at prices higher than internal parity to overcome supply constraints.

Difficulties in this regard can be overcome somewhat if the estimated foodgrain output of over 214 million tonnes in the 2007-08 agricultural season can be realised. No precise assessment in this regard can be attempted at this stage as the unprecedented floods in Eastern U.P., Bihar, Assam, Orissa, Gujarat and Karnataka may impact food and cash crops in the kharif season. With the continuing deficit in food grains and oil supplies, the expenditure in foreign exchange on imports as well as subsidies will be on the rise.

The Finance Ministry has not so far had any problem of finding the requisite rupee resources as tax revenues have been buoyant. Nevertheless the need to extend liberal assistance to several States affected by unprecedented floods may upset the calculations of the Central Exchequer.

P. A. SESHAN

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