Indian govt may cut customs duty to keep inflation below 5 per cent

By Vipin Agnihotri

Indian government may minimize custom duties on number of items to keep inflation below 5 percent. Finance Minister P Chidambaram, while talking to The India Street said government was ready to take further fiscal steps to control inflation and keep it below 5 percent.

It is worth mentioning in this regard that inflation had crossed 6.7 percent in starting of the year- the highest level seen in more than two years. Though, due to number of measures taken by government and Reserve bank of India (RBI), it has since softened to 5.7 percent by the end of April.

“It is still above the tolerance limit. Our objective now is to keep inflation between 4 and 4.5 percent. We will make every effort to bring it down,” pointed out Chidambaram. The pivotal factor here is that if government’s fiscal measures would not be adequate, the central bank would also take further monetary steps towards this end.

If experts are to be believed, government’s determination to check inflation between 4 and 4.5 percent and not allowing rupee to depreciate, in turn, will see continuation of tightening of the money supply. From the starting of the year, government has taken various measures such as reducing custom duties on the import of pulses, edible oils, steel, cement and other essential commodities.

In addition, Reserve Bank of India also took a number of measures to restrict the money supply. These sorts of steps led to rise in interest rates, which affected sectors like real estate and consumer durables. Statistic wise: In the last three months, home loan interest rates have increase by around three percentage points to 12 percent from 9 percent. What’s more, the consumer loan rates have also increased substantially. The increase in the interest rates have also raised interest burden on the companies.

“To contain inflation through restricting money supply, Reserve Bank of India almost stopped buying dollars from the market. This has led to steep appreciation of rupee by around 8 percent since the starting of the year,” pointed out Dr Suvrokamal Dutta, renowned finance expert.

This move has affected exporters very badly. But one thing is for sure; it has helped the government to contain inflation. In other word, as rupee appreciated, the prices of imported items in rupee term declined, which has forced the domestic producers not to increase prices of their products.

At the same point of time last year, inflation had moved up in the range of 5 percent, lots of analysts were of the opinion that it would automatically come down to around 5 percent in the next two weeks because of the base effect. But, fact remains that if government is interested in bringing down inflation in the range of 4 percent to 4.5 percent, the high interest rate regime would continue for some more time.

Finance minister has already said that high global prices of crude oil and metals were due to rising demand in India and China, besides stagnation in Indian agricultural production, were the main reason behind high inflation. “There is no short cut to bring down inflation. Prices will not come down unless we augment supply of food grains including wheat, rice, pulses and edible oil,” pointed out Chidambaram.