Experts say that the steps taken by the government to deal with inflation may have an impact on GDP growth.
New Delhi:
Economists and industry executives said India’s export duty hikes and tax cuts would hurt economic growth and increase the likelihood of a widening fiscal deficit, but would do little to bring retail prices down within the central bank’s tolerance level. reduce.
Over the past month, India’s fiscal and monetary policy has made a U-turn from being growth-focused to respecting inflation – the central bank raised the key interest rate by 40 basis points, and the government increased taxes on fuel. cutting and discouraging exports.
Sonal Verma, an analyst at Nomura, said, “The announced measures mark a tacit acceptance by the government that both fiscal and monetary policies are set to be implemented to contain inflation.”
Yet, despite government intervention, India could end up with retail inflation at least 100 basis points above its 6 per cent tolerance level, said economists at banks such as HSBC and Nomura, as key food prices are likely to rise. .
The move could hurt growth and widen the fiscal deficit by 40-50 basis points, he said, despite the central bank governor saying India’s fiscal deficit at 6.4 per cent of its GDP could The goal is likely to be achieved.
Suvodeep Rakshit of Kotak Economic Research said higher borrowing costs due to rate hikes and measures like export tax, which could slow down capital expenditure, would hurt growth prospects.
“The recent shock to growth and uncertainty over consumer demand could further propel the revival in the private investment cycle,” Rakshit said.
He kept his inflation forecast for 2022-23 unchanged at 7.2 per cent.
India imposed an export tax of 15 percent on 11 steel products and increased the tax on iron ore exports, effectively slowing exports of such products, months later prompting companies to step up capital expenditure and boost exports.
“It would discourage capital expenditure in this country. People started investing in capex, and it was not made to serve the domestic market,” VR Sharma, managing director of Jindal Steel & Power, told Reuters.
Mr Sharma said the move takes the industry away from boosting exports and helps the government achieve its $1 trillion export target by 2030, which stood at $669.65 billion in 2021-22.
A basket of iron and steel products registered the second highest rate of growth among all major commodities, and accounted for 7.5 per cent of all exports, during the year ended March 2022.
Christian de Guzman of Moody’s Investor Service said the government’s earlier move to ban wheat exports would also hurt exports and growth.
sticky inflation
To revive the pandemic-hit economy, the government had planned to spend Rs 7.5 lakh crore ($96.61 billion) in infrastructure in 2022-23, which began on April 1.
But after retail and wholesale inflation hit a multi-year high in April, the government cut taxes on petrol and diesel, affecting revenues of Rs 1 lakh crore, and a loss of Rs 2 lakh crore as the situation worsened. Will happen.
The cost of fighting inflation could be around 8 per cent of the total expenditure planned for the current fiscal.
Petrol weighing 2.2 per cent in the consumer price inflation basket, while diesel weighing 0.15 per cent, is much lower, and economists say it will not affect retail inflation lowering by more than 50 basis points in the coming months.
Economists expect an upside risk to inflation due to rise in food prices and electricity rates and higher input costs for firms to compensate for the measures taken by the government.
“Higher food inflation, pending hike in electricity rates, continued passing of higher input costs from firms to consumers and other second round effects are likely to drive inflation higher,” said Ms. Verma of Nomura.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)