How the RBI can disbalance the budget balance sheet of the Central Government

Introduction

The Reserve Bank of India (RBI) is increasing interest rates to control inflation. Now in coming June month the RBI’s monetary policy committee meeting is due to take decision on interest rates evaluating inflation and other economic data It is important to note that the present inflation in India is systemic; as more or less all major consuming foods and commodities prices are relatively higher eventhough India is self-sufficient in their production. The Central Government’s intervention is working fast but the RBI’s measure of increasing interest rates to control inflation is not giving fast desired results on ground. However it is important to note that RBI’s increasing interest rates measure can disbalance the budget balance sheet of the Central Government.

Impact of increasing interest rates on balance sheet of the Government

The major effect of increasing interest rates will be on interest subsidy based programs and fertilizer subsidy programs. Interest subsidy programs have 2022-2023 budget outlay of about 25000 crores and fertilizer subsidy program has budget outlay of about 1 lakh crore (Table 1 & 2).

Table1. Subsidy and interest related expenditures 1.

Table 2. Subsidy and interest related expenditures 2.

 

On the other hand the Central Government pays fertilizer subsidies to fertilizer companies on the basis of actual sales made by the retailers to the beneficiary’s farmers. The subsidy is paid on fertilizers sold for direct agriculture uses. With rise of interest rates the fertilizer companies cost can increase. Then companies will sell fertilizers at higher prices in the market. This may misbalance the budgetary provisions of the Central Government as it will have impact on agriculture also.

The Central Government runs on budget deficit. That means more expenditures than their taxes and other revenues. Such deficit based budget planning is forcing the Central Government to borrow more money to pay for those expenditures. In year 2022-2023 budget, which is of about 45 lakh crore, about 10 lakh crore will go as an interest payment to service the debt. Revenue receipts are only of about 26 lakh crore and government is targeting to take loan of about 17 lakh crore. Now the borrow cost will be higher for the government due to relatively higher interest rates. So government’s financial capacity is tight. RBI’s further increase of interest rates will further hamper the Governments’ planned expenditures. With higher interest rates the Central Government will have to either cut the number of beneficiaries or will have to increase their debt to cover the targeted beneficiaries. This will misbalance the budget as well as have negative effect on Rupee currency value.

Conclusions

The Reserve Bank of India’s increase of interest rates will hamper Governments budgetary planned expenditures due to higher cost of burrowing and interest rates payment. This may force Government either to burrow more to meet targeted beneficiaries or cut the number of beneficiaries. This will disbalance the budget as well as have negative effect on Rupee currency value.