India has announced a 26 billion USD plan to combat inflation. It includes lower taxes on gasoline and diesel at the pump, lower tariffs on steel imports, and greater fertilizer subsidies.
The government announced these measures over the weekend. It came after inflation in the country reached an eight-year high, and wholesale inflation climbed to at least a 17-year high. The Indian Reserve Bank raised interest rates for the first time in four years.
India is one of many countries grappling with how to limit a rise in consumer prices that is jeopardizing their recovery from the pandemic and putting many economies dip recession.
The New Measures
The new plans by the government of India would double the 1 trillion INR hit government revenues could take from tax cuts on fuel, reported Reuters, citing two officials familiar with the matter.
“We are focused on bringing down inflation. The impact of the Ukraine-Russia crisis was worse beyond anyone’s imagination,” said one of the two officials.
The government expects that another 500 billion Indian rupees will be required to support fertilizers, up from the present estimate of 2.15 trillion rupees, added two officials.
In addition, the Indian government could also deliver another round of tax cuts on fuels if crude oil keeps on rising. It could add another hit of 1 trillion to 1.5 trillion INT in the current financial year, which started on 1st April.
Fiscal Slippage
One of the officials stated that the government might need to borrow additional loans from the market to fund these measures. It could lead to a fiscal slippage from its deficit target of 6.4% of GDP for the FY 2022-2023.
However, the sources did not quantify fiscal slippage or the amount of borrowing. They stated that it is depended on how much funds they would divert from the budget this financial year.
According to the budget announcements made in February, the GOI is planning to borrow about 14.31 trillion INR in the current financial year.
“The new measures would cost the Indian government about 2 trillion INR, or 26 billion USD,” wrote analysts at Nomura Holdings Inc. “It will push the budget deficit for the current financial year to 6.8% of GDP, from the originally budgeted 6.4%.”
Analysts at Nomura wrote that “fiscal slippage seems inevitable now.”
Expansion of Government Debt
“The new measures could play a vital role in easing inflation,” wrote Sri Virinchi and Rahul Bajoria of Barclays PLC in a report to clients. They also added that the central bank likely to maintain a tighter monetary policy.
Likewise, Citigroup Inc’s Samiran Chakraborty and Baqar Zaidi wrote that “Fiscal and monetary officials are delivering a unified front in their fight against price pressure.”
In the financial year ending March 2023, India had planned to generate roughly 14.3 trillion rupees through debt issuances. Banks and insurance companies are the largest buyers of the national debt, with the total borrowings in local currency.
