Geopolitical tensions increase economic and political risks

- India depends on oil imports for a large part of its needs, so a shortage in supply will affect economic activity

Renewed geopolitical tensions in West Asia have increased economic and political risks. Although efforts have been made to deal with this crisis, there is no telling how far the threat may go due to the possibility of involvement of other regional and global powers in the current conflict between Israel and Palestine. The most obvious risks are linked to global growth and crude oil supplies. Although crude oil prices have increased, partly due to restrictions imposed by major producers, such supply disruptions can affect both the availability and price of crude oil.

India depends on oil imports for a large part of its needs, so a shortfall in supply could affect economic activity. Although global growth has been strong so far this year, the situation could change in the coming quarters. If policy actions by major central banks, particularly the US Federal Reserve, tighten financial conditions and conflict escalates in West Asia, the economic outlook could change rapidly.

Economic experts said that currently, the government is confident that it will achieve the target of keeping the fiscal deficit at 5.9 percent of GDP this year. But the market borrowing plan for the second half of the year shows that total borrowing is at the budgeted level. The latest monthly review of the Finance Ministry said that the direct tax collection increased by 26.6 percent year-on-year in the April-August 2023 quarter. The Goods and Services Tax collection has also increased by 10 percent so far this year.

Talking about expenditure, capital expenditure, a key driver of growth, was 48 per cent higher year-on-year in the April-August quarter. Higher capital expenditure by the government in recent years has also helped improve the quality of government spending. The government will be confident of achieving the targets outlined in the budget this year but planning to deal with the impending shocks will not be easy.

Although the government has managed to reduce the fiscal deficit from the peak of Corona, it is still at a relatively high level and will not be able to adequately respond to external economic shocks. The focus on capital expenditure has certainly helped to maintain economic momentum but it has also slowed down the process of fiscal consolidation.

The government's ability to respond to external shocks depends on the available policy space, and in terms of fiscal policy, it is currently quite limited. Now that the government is engaged in pre-budget discussions, it seems prudent to work on options to limit spending and create policy space for the current and future years.

Certainly this will not be easy to do as there will be many demands from the budget, especially since it is an election year. A shock to rapid growth or commodity prices could widen the fiscal deficit and make it difficult to achieve medium-term goals. A persistently high fiscal deficit will reduce government space and weigh on growth prospects in the medium term.