Reducing the impact of inflation: The Center has done some of its work on auto fuel, the states must.

The government’s decision to cut revenue by an estimated Rs 1.06 trillion due to reduction in excise duty on petrol and diesel and subsidy on LPG cylinders was a long-awaited move. This is expected to act as a cushion for consumers in the face of rising inflation and oil marketers raising the price of auto fuel. After all, tariffs and taxes account for 40-50% of retail fuel prices. The government plans to spend an additional 10 1.10 trillion on fertilizer subsidies – as a result of expensive imports – and lower import duties on steel and raw materials for plastic products.

Excessive spending may have some effect on government finances, but the current fiscal’s revenue may exceed the conservative tax collection estimate of Rs 27.6 trillion. This will be due to better than expected GST collection initially – GST mop-up has strengthened over the last nine months, with April collection hitting Rs 1.68 trillion. Economists also point out that the numbers baked in the FY23 budget are conservative and that the center’s tax receipts, state relocation net, could be 1.4-1.5 trillion more than the budget’s Rs 19.35 trillion. Prior to the latest decision, Finance Secretary TV Somanathan was confident that an additional expenditure of Rs 1.8 trillion on fertilizer and food subsidies could be achieved through better net tax collection and greater investment income. However, it is still early days, and with no end to the Russia-Ukraine feud, uncertainty in the global economy, talk of a US recession, poor visibility in crude oil prices, and rising interest rates, it would be wise not to count them before the chicks come out.

At the same time, measures are needed to help curb fugitive prices of goods and services that could harm newborn recovery and D-rail growth. Retail inflation in April came in at around 8%, the Reserve Bank of India (RBI) is outside the tolerance limit of 6%, and it threatens to suffocate consumer demand, which has now been generally sluggish for many quarters. Personal Final Cost (PFCE) increased 7% year-over-year in 3FY22, but it came from an anemic base of only 0.6% year-over-year in 3FY21. As companies bear their additional costs on raw materials through inflation, inflationary pressures may be imposed. Against this backdrop, any attempt to keep the price in check will complement the RBI’s efforts, which could be the first in a series of interest rate hikes aimed at controlling inflation earlier this month. A 40-basis-point rise in the repo rate has pushed bond yields to 7.3-7.4% in the long run and even higher in the short term. If inflation expectations rise, yields could rise further, making it difficult for the government to borrow Rs 14.31 trillion this year. It is important, even critical, that the government be able to raise money from the market to be able to spend, especially capital expenditure. At Rs 12.2 trillion, the budgeted capex has increased by only 10% with the expenditure of public sector initiatives and 1 trillion assistance to the states. As a result, in order to support the economy, the government must use some of the money it has — and some of it.

Very few states followed the Center after the last round of diesel and petrol tariff cuts in November last year. At this point, however, they must do something to reduce state tariffs so that households can see a significant reduction in prices and prevent the cascading effects of already rising diesel prices. States must remember that the economy is as much theirs as the center and that any recession will hurt them. This is not the time for politics.

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