India’s fight against inflation will hurt growth and risk widening the fiscal gap

Workers load consumer goods onto supply trucks at a wholesale market in Kolkata, India, December 14, 2021. REUTERS/Rupak of Chowdhuri

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  • Retail price inflation will remain above RBI’s tolerance range
  • Wheat and steel exports will be affected
  • India’s fiscal deficit in 2022/23 could widen by 40-50 basis points

NEW DELHI, May 23 (Reuters) – India’s export duty hikes and tax cuts will likely hurt economic growth and increase the risks of a widening budget deficit, but will do little to lower retail prices within the central bank’s tolerance limits, economists and industry officials said. mentioned.

Over the past month, India’s fiscal and monetary policy has shifted from being growth-oriented to focusing on inflation – with the central bank raising the policy interest rate by 40 basis points and the government reducing fuel taxes and discouraging exports.

“The measures announced mark a tacit admission by the government that fiscal and monetary policies must be deployed to bring down inflation,” said Sonal Varma, an analyst at Nomura.

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Yet despite government intervention, India could end up with retail inflation at least 100 basis points above its 6% tolerance level as major food prices are set to rise, said economists from banks like HSBC and Nomura.

These measures could hurt growth and the budget deficit could widen by 40 to 50 basis points, they said, although the central bank governor said India was likely to hit its deficit target. budget to 6.4% of GDP.

Higher borrowing costs due to rate hikes and measures such as export taxes that could slow capital spending will hurt growth prospects, said Suvodeep Rakshit of Kotak Economic Research.

“The recent decline in growth and uncertainty over consumer demand are likely to push back the recovery in the private investment cycle even further,” Rakshit said.

It kept its inflation projection unchanged at 7.2% for 2022/23.

India has imposed a 15% export tax on 11 steel products and raised taxes on iron ore exports, effectively slowing exports of these products, months after pushing companies to increase spending investment and their exports.

“It will discourage investment spending in this country. People have started investing in investment, and it was not designed to serve the domestic market,” VR Sharma, managing director of Jindal Steel & Co., told Reuters. Power.

Sharma said the move moves the industry away from boosting exports and helps the government meet its export target of $1 trillion by 2030 from $669.65 billion in 2021/22.

A basket of steel products recorded the second highest growth rate among all major commodities in the year ending March 2022 and accounted for 7.5% of all exports.

The government’s earlier decision to ban wheat exports will also hurt exports and growth, said Christian de Guzman of Moody’s Investor Service.

TIGHTS INFLATION

The Indian government had planned 7.5 trillion rupees ($96.61 billion) in infrastructure spending in 2022/23 which kicked off from April 1, to revive the pandemic-hit economy.

But after retail and wholesale inflation hit multi-year highs in April, the government slashed taxes on petrol and diesel, which cut revenue by 1 trillion rupees, and in will suffer another 2 trillion rupees if the situation worsens. Read more

The cost of fighting inflation could represent close to 8% of the total planned expenditures for the current fiscal year.

Gasoline has a weight of 2.2% in the consumer price inflation basket, while diesel has a much lower weight of 0.15%, and economists have said that won’t have impact on the moderation of retail inflation by more than 50 basis points in the coming months.

Economists expect upside risk to inflation from higher food prices and electricity tariffs, and higher input costs for businesses, to offset the measures taken by the government.

“Higher food inflation, impending electricity rate hikes, continued shifting of higher input costs from businesses to consumers, and other second-round effects are likely to drive inflation,” Verma said. from Nomura.

($1 = 77.6350 Indian rupees)

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Additional reporting by Swati Bhat in Mumbai and Chris Thomas in Bangalore; Editing by Bernadette Baum

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