The Indian rupee continues to weaken against the US dollar. If the RBI does not intervene decisively, the exchange rate could well slide to Rs 100 per US dollar. To stabilise the rupee, the RBI may need a war chest of at least $50–60 billion, and even that would provide only temporary relief. The underlying causes of the crisis lie largely beyond the RBI’s control.
The crisis in the Middle East is finally hitting India pretty hard. Energy and fertiliser costs have almost doubled. The recent increase in petrol prices by around Rs 3-4 per litre is only a partial pass-through of global prices. Similar underpricing exists in LPG, LNG, and fertilisers, especially urea. These pressures are likely to widen the fiscal deficit beyond 5 per cent of GDP.
Foreign portfolio investors are losing interest in India and withdrawing their investments. Domestic investors are equally worried and are not coming forward to invest big. The IMD has forecast a strong El Niño. As a result, the Indian economy is losing momentum. Our calculation, based on today’s conditions, is that in the current financial year (FY27), India will be lucky to clock 6 per cent GDP growth and contain Consumer Price Index (CPI) inflation below 6 per cent. If the Strait of Hormuz remains closed for another three months, GDP growth will fall below 6 per cent, and CPI inflation will shoot above 6 per cent — the upper band of the RBI for inflation control. The RBI will not have much choice but to raise the repo rates soon, triggering the northward movement of all interest rates. The economy seems to be on the brink of a major crisis. The only rational way to avoid this is to carry out major reforms, similar to those in 1991.
Prime Minister Narendra Modi has called for austerity measures, and some chief ministers have reportedly travelled on motorcycles, metros and electric cars. Such tokenism does not last long. After returning from his five-country visit, Modi held a meeting with his cabinet colleagues and asked them to carry out reforms that can save resources, especially energy, narrow down the twin deficits of trade and current account, and restore confidence in India’s growth story. The technical blueprint of economic reforms is not difficult to prepare, but what is required is the political will to undertake such reforms. The culture of distributing freebies, at the central as well as the state level, is now deeply entrenched. That’s the biggest hurdle in carrying out structural reforms. Let us demonstrate with the examples of fertiliser and food subsidies.
Take the case of fertilisers first. India imports anywhere from 20 to 25 per cent of its urea requirements. The last import tender showed that the minimum price of urea’s landed cost on the west coast would be $935/tonne. But it is being sold at less than $70/tonne to farmers. How prudent is this? Let the readers judge. But what we know is that such pricing creates a large arbitrage — a large amount that is being diverted away from agriculture to other industrial uses in India and also smuggled out to neighbouring countries. Bihar is an interesting example. Government data on fertiliser supply and usage reveal a mismatch. While official figures show large quantities of urea, DAP, and MOP being supplied, another set of government data — the Cost of Cultivation surveys used to determine the minimum support prices for major crops — suggests that actual on-farm usage is more than 50 per cent lower than the quantity supplied. The obvious question is: Where does the rest go?
Anyone familiar with Bihar’s ground realities knows that the state has long been an easy route for fertiliser diversion into Nepal. Reports from border districts also indicate that subsidised fertilisers are routinely smuggled into Bangladesh. The root cause is the enormous subsidy on urea, which today covers nearly 90 per cent of its cost.
The fertiliser subsidy bill, budgeted at Rs 1.71 lakh crore for FY27, is almost certain to exceed Rs 2.25 lakh crore and could even touch Rs 2.50 lakh crore. The ultimate solution — the real brahmastra — lies in reforming the entire chemical fertiliser subsidy regime by moving towards a direct benefit transfer system on a per-acre basis, integrated with the PM-Kisan scheme. Concerns relating to tenant farmers can be addressed by triangulating different data sets, provided the government gives this reform the same priority it once accorded the Jan Dhan-Aadhaar-mobile linkage initiative.
Once this transition is made, fertiliser prices should be left to market forces. That would curb leakages and the smuggling of urea, correct the imbalance in the use of nitrogen, phosphorus, and potassium, and improve nutrient use efficiency. Such reforms could save the government at least Rs 40,000–50,000 crore annually.
If comprehensive reform is politically difficult, the second-best option would be to impose quantitative restrictions on fertiliser sales based on landholding size and the crops being cultivated. If even that proves unfeasible, a third alternative would be to bring urea under the nutrient-based subsidy scheme, raise urea prices gradually, and potentially reduce the prices of phosphatic and potassic fertilisers, while keeping the overall subsidy bill around Rs 2 lakh crore.
A similar issue arises with food subsidies. The food subsidy bill for FY27 is budgeted at Rs 2.28 lakh crore. Yet, if the government claims that extreme poverty has fallen to 5.3 per cent, according to World Bank standards, or around 11 per cent according to NITI Aayog’s Multidimensional Poverty Index, why should free foodgrain continue to be distributed to more than 800 million people? Rationalising the coverage under the scheme or increasing issue prices for those above the poverty line could potentially save another Rs 50,000 crore annually.
Failing to undertake these reforms would reflect not caution, but policy timidity.
Gulati is distinguished professor and Juneja a senior fellow at ICRIER. Views are personal
