India unveiled inflation-fighting fiscal measures estimated to cost US$26 billion that include lower fuel taxes and import levies, raising speculation the government would expand its bond borrowing program and potentially easing pressure on the central bank.
The measures announced over the weekend by Indian Prime Minister Narendra Modi’s administration come after inflation climbed to an eight-year high, driven by commodities and supply-chain shocks, and the Reserve Bank of India (RBI) began raising interest rates for the first time in almost four years.
As part of India’s plan to ease pressure on consumers, the federal government slashed levies on pump prices of gasoline and diesel, waived import tax on coking coal, which is used to make steel, and increased subsidies on fertilizers and cooking gas.
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“The new measures could play a key role in easing price pressures,” Rahul Bajoria and Sri Virinchi Kadiyala at Barclays PLC wrote in a report to clients on Sunday, adding that the central bank would likely still maintain its path toward tighter monetary policy.
The lost revenues and higher spending are expected to add to the record borrowing program already undertaken by Modi’s government.
The new measures are estimated to cost 2 trillion rupees (US$26 billion), analysts at Nomura Holdings Inc wrote in a note on Sunday, adding that this would push the budget deficit for the current year to 6.8 percent of GDP, from the original forecast of 6.4 percent.
“Fiscal slippage now appears inevitable,” Nomura analysts wrote.
The revenue hit from the fuel tax would likely result in an extra 1 trillion rupees of government borrowing, people familiar with the matter said.
The government’s steps follow a recent shift toward inflation fighting by the RBI, which announced a surprise rate hike earlier this month. The central bank is expected to continue raising rates as prices are forecast to cruise above its 2 to 6 percent target for much of the year.
“Fiscal and monetary authorities are presenting a unified front in their fight against inflation,” Samiran Chakraborty and Baqar Zaidi at Citigroup Inc wrote in a note on Sunday.
India had earlier budgeted to raise about 14.3 trillion rupees through debt issuances in the fiscal year through March next year. The entire borrowings are in local currency, with banks and insurance companies the biggest buyers of sovereign debt.
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