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Tax hikes, though needed, may put pressure on prices

Brace yourself for a new spell of high prices — post finance minister Pranab Mukherjee's budget on Friday. HT Correspondent reports. Future Tense

business Updated: Mar 18, 2012 00:31 IST
HT Correspondent
HT Correspondent
Hindustan Times
budget2012,Pranab Mukherjee,RBI

Brace yourself for a new spell of high prices — post finance minister Pranab Mukherjee's budget on Friday.

Mukherjee raised the excise duty by two percentage points to 12% for most manufactured goods and brought more services under the tax regime. Costlier manufactured goods, such as cars and consumer durables, are likely to push up the inflation rate that has already begun climbing back after a brief southward journey.

The higher inflation, in turn, may prompt the RBI to maintain interest rates at high levels, a move that may squeeze households further, as EMIs on home loans are unlikely to come down anytime soon.

The wholesale price index-based inflation rate — India's most watched cost of living index — was at 6.95% for February after falling to a two-year low of 6.55% for the previous month.

On Thursday, a day before Mukherjee presented the budget, the RBI said despite the "deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions".

On Saturday, Mukherjee, however, defended the excise duty and service tax increases. "Excise duty was 14% till 2008. Because of the financial crisis, I reduced it first to 8% and then to 10%. This year, it has been raised to 12%. I have partially restored it (the rate till 2008)," he told a television channel.

He said, "I have brought the service tax also up to 12% because our ultimate objective is to implement the Goods and Services Tax (GST). The service tax and excise duty will have to be aligned."

The GST is aimed at stitching together a common national market by subsuming a welter of local levies, such as octroi and VAT, under a single-tax regime.

Mukherjee, thus, quietly withdrew the fiscal stimulus dished out three years ago to weather the world economy's worst crisis in 80 years, but at a time when the economy is hit by a crippling industrial slowdown.

"The increase in excise duty will hurt automobiles, at a time when industry is in the midst
of a slowdown due to the combined effect of high interest rates and high fuel prices," said Shinzo Nakanishi, managing director and CEO, Maruti Suzuki India.

"We have no choice but to pass on the price increase to the consumer," echoed Sandeep Singh, deputy managing director, marketing, Toyota Kirloskar Motors.

What's more, sluggish industrial growth means fewer job opportunities and smaller pay hikes as corporations stall investment plans, slow down hiring and prune wage bills. But Sonal Varma, economist at research and broking firm Nomura, said, "The hike in indirect tax rates is inflationary, but was necessary."

Led by an across-the-board slowdown, India's industrial output growth moderated sharply, confirming fears about a slowdown as rising input costs and costlier borrowings squeeze corporate profitability, forcing them to defer planned investments.

Amid signs of a sputtering economy, industry had been demanding cheaper interest rates and friendlier fiscal policies to boost growth.

"There was no action in the budget to deal with the suppressed inflation. While there may be a token (interest) rate cut in April, cumulative rate easing is unlikely," said Rajeev Malik of Singapore-based CLSA.

First Published: Mar 18, 2012 00:13 IST