Fiscal Management - India
How India Can Safeguard Its Fiscal Fortress Amid Global
Turmoil
R Kannan
India entered the 2026–27 financial year from a position of
hard-won macroeconomic strength. With a disciplined fiscal consolidation
roadmap targeting a fiscal deficit of 4.3 percent of GDP—down from 4.4 percent
the previous year—and a declining debt-to-GDP ratio of 55.6 percent, New Delhi
had positioned itself as the world’s fastest-growing major economy. Yet, in an
interconnected global economy, domestic prudence is constantly tested by
external shocks. Escalating geopolitical hostilities in West Asia and widening
conflict across the Middle East have triggered a classic "twin-deficit and
inflation squeeze," placing India’s fiscal architecture under severe
strain.
The mechanics of this pressure are straightforward but
unforgiving. Because India imports roughly 85 percent of its crude oil and over
half of its natural gas, shipping disruptions near the Strait of Hormuz and the
Red Sea have pushed crude prices past the $90 to $120 per barrel threshold and
sent liquefied natural gas (LNG) and cooking gas costs soaring. This energy
shock widens the Current Account Deficit, pressures the Rupee, and injects
cost-push inflation into domestic logistics and manufacturing—forcing the
Reserve Bank of India to hold the repo rate steady at 5.25 percent while
revising inflation projections upward.
Simultaneously, trade stress and revenue compression are
eroding the exchequer’s buffers. Maritime rerouting around the Cape of Good
Hope has inflated freight rates by up to 50 percent, squeezing the margins of
export-oriented Micro, Small, and Medium Enterprises (MSMEs). At home, slashing
excise duties on petrol and diesel to shield citizens from pump-price
shocks—combined with softer discretionary consumption—has dampened indirect tax
buoyancy. On the expenditure side, surging global feedstock prices have driven
up food, fertilizer, and fuel subsidy bills, even as domestic inflationary
distress necessitates higher social welfare grants for vulnerable households.
The central policy dilemma for New Delhi is clear: how to
absorb surging subsidy and welfare obligations without abandoning its ₹12.2
lakh crore public capital expenditure push or breaching its fiscal deficit
targets. Protecting India’s financial stability requires a synchronized,
strategy spanning subsidy reform, non-tax revenue mobilization, energy
insulation, and structural fiscal discipline.
The first pillar of defence lies in expenditure
rationalization and subsidy reform, ensuring every rupee spent delivers
maximum social impact. First, the government can enforce strict subsidy
targeting through Direct Benefit Transfers (DBT) and real-time Aadhaar-eKYC
linkages, weeding out ghost beneficiaries and affluent households from food,
LPG, and fertilizer rolls. Second, India can transition from subsidizing urea
manufacturers—a policy that encourages soil degradation and cross-border
smuggling—to direct per-acre cash transfers for farmers, capping the budget’s
open-ended exposure to global gas prices. Third, aggressively scaling domestic
Nano-Urea, Nano-DAP, and bio-fertilizers can reduce expensive chemical
fertilizer imports by up to 30 percent over the next two crop cycles.
Beyond subsidies, the administrative machinery itself can
tighten its belt. Fourth, New Delhi could rationalize Centrally Sponsored
Schemes (CSS), merging overlapping programs and sunsetting outdated grants to
redirect revenue expenditure toward targeted inflation relief. Fifth, enforcing
zero-based budgeting across central ministries—requiring every department to
justify its baseline spending from scratch and accept 5 to 10 percent
operational austerity cuts—will curb bureaucratic bloat. Sixth, the government can
operationalize and replenish dedicated economic stabilization buffers, such as
the ₹1 lakh crore Economic Stabilisation Fund, drawing on inter-ministerial
savings to absorb sudden commodity price spikes without bloating market
borrowings.
With tax revenues under cyclical pressure, the second pillar can
focus on aggressive non-tax revenue mobilization and tax buoyancy.
Seventh, New Delhi can accelerate strategic disinvestment and the privatization
of non-core Central Public Sector Enterprises (CPSEs), unlocking non-debt
capital receipts while ending recurring bailouts for loss-making units. Eighth,
scaling up the National Monetisation Pipeline (NMP) by leasing brownfield
assets—highways, power transmission lines, telecom towers, and warehouses—to
institutional investors will generate vital upfront capital. Ninth, widening
the direct tax base through artificial intelligence and automated data
analytics—cross-matching GST filings, high-value banking transactions, and
property registries—can curb evasion without raising tax rates.
Tenth, the government could maintain calibrated windfall
profit taxes on domestic crude producers and export-oriented refineries
whenever global oil breaches $85 to $90 per barrel, capturing super-normal
gains to cross-subsidize domestic fuel relief. Eleventh, rationalizing Goods
and Services Tax (GST) slabs, plugging fake Input Tax Credit (ITC) leakages via
biometric authentication, and gradually bringing excluded revenue generators
like Aviation Turbine Fuel and natural gas into the GST fold will strengthen
indirect tax collections. Twelfth, enforcing strict capital-allocation
guidelines will maximize sovereign dividends from cash-rich PSUs alongside
surplus transfers from the RBI.
The third pillar requires structural energy security to
permanently compress India’s import bill. Thirteenth, New Delhi can
diversify crude and LNG procurement toward non-conflict regions across West
Africa, Latin America, Russia, and the Americas through long-term, fixed-band
bilateral contracts that insulate India from Middle Eastern spot-market
volatility. Fourteenth, accelerating the 20 percent ethanol-blending target,
scaling rooftop solar under PM Surya Ghar, and incentivizing electric mobility
will structurally reduce fossil fuel dependence and conserve billions in
foreign exchange. Fifteenth, expanding Strategic Petroleum Reserves (SPR)
during price dips and constructing dedicated underground cavern storage for LPG
will ensure India is never forced into panic-buying at peak wartime prices.
Sixteenth, operationalizing Rupee-denominated Vostro accounts and
local-currency settlement mechanisms with major energy suppliers will reduce
dollar outflow pressure and protect foreign exchange reserves.
Finally, the fourth pillar can protect domestic growth
engines, trade resilience, and federal fiscal discipline. Seventeenth, New
Delhi can ring-fence high-multiplier capital expenditure in railways, roads,
and logistics; every rupee spent on public infrastructure generates a 2.5x GDP
multiplier that sustains private investment and tax revenues during global
slowdowns. Eighteenth, extending targeted interest subvention, emergency credit
guarantees, and export credit insurance through ECGC will help export MSMEs
absorb elevated shipping costs without defaulting. Nineteenth, strengthening
domestic food supply chains through Open Market Sale Schemes (OMSS), calibrated
export duties on essential staples, and buffer-stock imports of pulses and
edible oils will tame core food inflation—preventing automatic spikes in
government Dearness Allowance (DA) and welfare payouts. Twentieth, the Centre can
enforce strict fiscal discipline at the state level by linking additional
borrowing permissions to adherence to Fiscal Responsibility and Budget
Management (FRBM) limits, ensuring unfunded populist freebies do not crowd out
private capital or drive up sovereign bond yields.
Geopolitical crises have historically served as catalysts for
India’s boldest economic reforms, from 1991 to the post-pandemic recovery.
Today’s Middle Eastern turmoil and trade fragmentation are no exception. By
replacing open-ended subsidies with targeted transfers, unlocking value from
public assets, diversifying energy sourcing, and protecting capital
expenditure, New Delhi can weather the external storm—emerging with its fiscal
credibility intact and its long-term growth trajectory unshaken.
