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Home Blitz India Media

The ball is now in states’ court

Blitzindiamedia by Blitzindiamedia
June 22, 2022
in Blitz India Media, economy, National, News
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As for ‘cooperative federalism’, the Centre has shown some leadership by reducing the cess component (not shareable with states) rather than the basic excise duty.

Virtually all states charge a hefty VAT (generally upwards of 25 per cent), be it Maharashtra, Gujarat, Karnataka, West Bengal, Telangana or Andhra Pradesh.

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Since the state levies are largely ad valorem-based, they increase with prices, therefore having a bigger inflationary impact. A reduction by states could bring down prices by more than ₹15/ litre for both fuels — reducing costs for producers and lifting consumer sentiment.

The Centre, with its latest cut, has brought down its share in petrol and diesel levies from ₹27.90/litre to ₹19.90/litre and ₹21.80/litre to ₹15.80/litre, respectively. Meanwhile, the share of states is still about ₹20/litre on an average. Lower prices will at the outset boost kharif operations, often hampered by unreliable electricity supply. A boost to output will lower inflationary expectations.

Faced with imported inflation and its crimping effects on growth, the options on the table are to reduce import tariffs and domestic levies, while ensuring that the exchange rate does not fall to neutralise this impact. The Centre has already lowered the duty on crude palm, sunflower, and soyabean oil. The latest move to reduce both steel and cement costs seems calculated to keep capex going despite adverse conditions.

However, the key is to ensure that the benefits of duty cuts are passed on.

After a sharp bout of IBC-driven consolidation in the industry, the top five primary steel producers in India have cornered about 55 per cent of aggregate capacity and 58 per cent of sales volumes.

Virtually all states charge a hefty VAT (generally upwards of 25 per cent)…. Since state levies are largely ad valorembased, they increase with prices, therefore having a bigger inflationary impact

With leading players also deferring their capex plans during the pandemic, the domestic supply situation is quite tight, giving major steel producers considerable pricing power. Vigilance on the part of CCI is called for in the case of steel and cement.

The Centre’s estimate that the move can have revenue implications of ₹1-lakh crore should be viewed against the positive growth and price scenarios in the medium term. Besides, the fuel price hit, lower surplus transfer from the Reserve Bank of India this fiscal year at ₹30,307 crore is also going to hurt the fisc.

The Union Budget had estimated receipt of ₹73,948 crore as dividends from the RBI and other public sector banks for 2022-23. It is true that the disinvestment target of ₹65,000 crore looks hard to get in view of prevailing market conditions. However, these are extraordinary times when budgetary projections need to be re-examined.

As for monetary policy, the RBI has its task cut out: to protect the rupee value by raising rates rather than increasingly resorting to the use of forex reserves to achieve the same. It is true that the inflationary pressures have been aggravated globally by the war in Ukraine and lockdowns in China and India, too, has suffered.

Neither the RBI nor the Government can do anything about these externalities. But, the Government can help reduce inflation and its impact on the poor. By taking the hard decision to cut fuel taxes at the cost of the exchequer, Prime Minister Modi has proved true to his word. For him, India’s poor come first.

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