NEW DELHI: The International Monetary Fund (IMF) has cautioned governments against resorting to broad-based subsidies to shield households from price shocks arising from the conflict in West Asia, holding that such measures could strain their already tight public finances.
Instead, the IMF has suggested rolling out “temporary, targeted, timely and tailored fiscal measures” to manage the challenges. Governments should reserve measures such as generalised subsidies and price caps for truly exceptional shocks.
“Measures not designed thoughtfully can be fiscally costly and difficult to unwind,” the multilateral financial institution said in a blog post. “They can also fuel additional inflation, worsen fiscal fragilities, or increase further global energy prices.”
The suggestions assume significance for the Indian central government, which is staring at a tight fiscal space in FY27 due to a likely revenue shortfall as well as expenditure overshoot.
“Let domestic energy prices reflect international costs,” the IMF said on Wednesday.
Meanwhile, the Indian government in late March cut excise duty on petrol and diesel to provide some cushion to oil marketing companies (OMCs) against high crude oil prices without raising retail prices. However, mounting under-recoveries eventually led OMCs to raise pump prices by nearly Rs 4 per litre this month.
The price of Brent crude has jumped more than 60 per cent and has mostly stayed above $100 per barrel since the onset of the US-Iran war on February 28.
The Centre’s recent cut in excise duty on petrol and diesel is expected to weigh on indirect tax collections in FY27, while possible slower growth may constrain direct tax buoyancy. Also, the government has already missed its direct tax collection target in FY26 and requires an ambitious 15 per cent growth in direct tax receipts in FY27 to meet the Budget target.
On the expenditure side, the government is already anticipating an overshoot in fertiliser subsidy. High crude petroleum prices are also likely to raise the oil subsidy bill in FY27.
According to the IMF, governments can adopt targeted cash transfers to people through existing social assistance systems. This can preserve price signals while limiting fiscal costs. “If coverage is insufficient, governments can temporarily top up payments or widen eligibility, including to lower- and middle-income households that are at risk of falling into poverty,” the IMF said.
Last week, speaking to the Indian diaspora in the Netherlands, Prime Minister Narendra Modi warned that decades of hard-won progress against poverty stood at risk of reversal if the war in West Asia is not quickly stopped.
For very large but temporary shocks, additional measures may include one-time rebates or spreading price increases over time, helping households cope without freezing prices outright, the IMF suggested. As a last resort, if food security is at risk and safety nets are not sufficient, temporary reduction in taxes or subsidies for essential food items may be appropriate if accompanied by a clear and credible timeline for ending them.
For businesses, governments should address short-term liquidity problems through sovereign-guaranteed loans, credit lines, or short-term tax and social-security deferrals. India has already moved towards this recommendation.
The government has rolled out the Emergency Credit Line Guarantee Scheme (ECLGS 5.0) with an outlay of Rs 18,100 crore to support micro, small and medium enterprises (MSMEs), airlines and other businesses in meeting working capital needs. Under the scheme, banks can extend government-guaranteed loans, covering 100 per cent of losses for MSMEs and 90 per cent for larger firms and airlines through the National Credit Guarantee Trustee Company Limited.
Source: Business Standard
