From duty cuts to export bans: How Center and RBI are jointly fighting inflation

NEW DELHI: Worried about rising prices of essential items, the government and India’s central bank are going all out to rein in inflation. High inflation affects the economy as one’s power goes down, which impacts the demand for goods and services. The prices of daily household commodities have also increased significantly. Between September 2021 and April 2022, consumer food price inflation in India has risen from 0.68% to 8.38% year on year. India’s retail inflation surged to an eight-year-high of 7.79 per cent in April while the Wholesale Price Index-based inflation rose to more than 15 per cent in April.
Even the global growth outlook appears grim as geopolitical tensions linger, commodity prices remain elevated and withdrawal of monetary accommodation gathers speed. Emerging face risks of capital outflows and higher commodity prices feeding into inflation numbers.
The Reserve Bank of India (RBI) was forced to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40 per cent earlier this month, while the Center has announced a series of measures to cool inflation.
Fiscal measures: Excise duty cut on petrol and diesel
The fiscal measures include a reduction in excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 per litre, along with reduction in customs duty for raw materials of plastics and steel, and an increase in export duty on iron ore and steel . The excise cut will reduce the price of petrol by Rs 9.5 per litre and of diesel by Rs 7 per litre (inclusive of the state VAT relief).
Subsidy on LPG
Additionally, over 90 million beneficiaries of the Pradhan Mantri Ujjwala Yojana will be given a subsidy of Rs 200 per LPG cylinder for up to 12 refills in a year; the revenue impact of the measure is around Rs 6,100 crore a year.
The cut in assorted excise levies on auto fuels will straightaway lead to a reduction in state VAT as is levied on a base that includes the Center’s taxes. Finance minister Nirmala Sitharaman asked state governments, especially those who did not cut VAT rates following the last round of excise cut in November 2021, “to also implement a similar cut and give relief to the common man”.
Subsidy on fertilisers
In order to cushion the impact of rising global prices of fertilisers due to the ongoing geopolitical tension between Russia and Ukraine, the government also announced an additional subsidy of Rs 1.10 lakh crore over and above the Rs 1.05 lakh crore provided in the budget. With this, the government’s total fertilizer subsidy is likely to touch a record RS 2.15 lakh crore in the current 2022-23 fiscal.
“Despite rising fertilizer prices globally, we have protected our farmers from such price hikes. In addition to the fertiliser subsidy of Rs 1.05 lakh crore in the budget, an additional amount of ₹1.10 lakh crore is being provided to further cushion our farmers,” Sitharaman tweeted.
India imports urea, potassic and phosphatic fertilisers.
Cement: Steps are also being taken to improve the availability of cement through better logistics.
Ban on wheat exports
On May 14, India announced a ban on wheat exports with the hope of bringing stability to wheat prices that have hit the roof amid supply disruptions due to the Russia-Ukraine war. The world’s second biggest producer of wheat banned private overseas sales of the grain on May 14 after a scorching heat wave curtailed output and domestic prices hit record highs. Global wheat prices surged after the decision. India has no plans to reconsider the export ban even though International Monetary Fund (IMF) chief Kristalina Georgieva has implored India to reconsider its ban on wheat exports, saying the country could play a key role in international food security and global stability.
Export will be allowed only on the basis of permission by the government to other countries to meet their food security needs based on the request of the governments. The ban on wheat export will help to cool prices of wheat and bring it closer to the MSP. This may further bring down the prices of wheat flour in the market.
Duty-free import of cooking oil
The government has allowed the import of 20 lakh tonnes of crude soy and sunflower oil per annum for two years at zero customs duty. It also cut basic customs duty on crude palm oil to 10 per cent till September.
Cooking oil prices have been rising due to the Russia-Ukraine war, as both countries are major exporters of the commodity.
In India, 85-90% of soya and sun oil is directly used in home kitchens while 10-15% is used in the food industry, mainly in the packed food segment like ready to eat, baked goods, snacks, pickles, dressings and sauces. So with zero duty on soy and sun oil retail consumers are expected to be benefitted the most.
“As all the edible oil prices are strongly correlated to each other, thus duty reduction in soy and sun oil shall have downward pressure on the prices of palm oil as well in coming months. Around 50-55% of palm oil imported in the country is consumed at industrial level and within the industrial usage HORECA and Food Processing Industry has a lion share of ~85-90% of the total industrial consumption.Within food processing industry palm oil is mainly used in, Industrial frying fat, Confectionaries, Ice creams, Non-Dairy Creamer, Salad Dressing to name a few. As per industry estimates, the industrial frying fat segment accounts for a major share of 25-30% of total palm oil consumed under the food processing industry. in non-edible FMCG industries like personal care, cosmetics, toiletries and cleaning products,” said Pushan Sharma, Director, CRISIL Research.
Ban on sugar exports
The government has capped sugar export and put it in the ‘restricted category’ from June to make the availability of sugar easily in the domestic market and check price rise.
India is the biggest producer of sugar in the world and the second-largest exporter after Brazil. The country has recorded the highest sugar exports so far in six years.
“As per the order issued by DGFT, with effect from 1st June, 2022 till 31st October, 2022, or till further order, whichever is earlier, the export of the sugar will be allowed with specific permission of the Directorate of Sugar, Department of Food and Public Distribution,” a government notification said.
These restrictions won’t apply to sugar being exported to the EU and the US under CXL and TRQ, the notification added.
Government has set a cap of 10 million tons for export of sugar during the period of June- October 2022. Further it has mandated exporters to seek permission from the Department of Food and Public Distribution before signing any further export contracts during this period.
“As per industry estimates, even prior to this announcement, India’s sugar export for sugar season(SS) 2022 (Oct-21 to Sep’22) had been estimated to be ~9-9.5 million tons. India has already exported 8.2 MMT of sugar in SS 2022 between Oct 21 to May’22. Sugar prices in the domestic market has already factored these export volumes and hence the Government’s move to put a cap will not be having a significant impact on sugar prices and export volumes up to October 2022 Overall, sugar prices are expected to rise by 10-11% on year during the current season (Oct 2021 to Sep 2022) to ~Rs. 35/kg. global sugar prices,” said Pushan Sharma, Director, CRISIL Research.
The government is keen to help with inflation management so that monetary tightening is kept to the minimum, as a sharp rise in interest rates can derail the economic recovery. RBI is expected to hike rates in the June policy meeting and the cumulative rate hike in June and August is likely to be 75 basis points.
“A history of monetary and fiscal policy coordination in the Indian context for the 30 year period ended FY2020 reveals statistically insignificant negative correlation between the two, implying least coordinated policies, even as RBI had successfully staved off automatic moneytization and even private placement of fresh issues with RBI, with the enactment of FRBM in 2003. The best thing that has emerged during pandemic is the coordinated policy response by both the Government and RBI in staving off the pandemic and now inflation, “noted SBI in a report.

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