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Inflation: Centre won’t trim its Capex plan despite inflation running hot

by WOOWinvest
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Inflation: Centre won't trim its Capex plan despite inflation running hot

Finance Minister TV Somanathan said the government would not cut capital spending this financial year, with experts suggesting that fiscal policy should help monetary policy manage inflation.

Long-term growth of the economy requires capital investment, and short-term development should not distract from that goal, he said. The government has budgeted Rs 7.5 crore capex in FY23 compared to the revised capex of Rs 6.03 crore in FY22.

“We will continue to commit to capital expenditures,” Somanathan said.

In a surprise move, the Reserve Bank of India (RBI) earlier this month raised the repo rate by 0.4 percentage points to 4.4% to curb runaway inflation that hit an eight-year high of 7.79% in April.

The center has budgeted a fiscal deficit of 6.8% of GDP for FY23, but due to the Ukrainian conflict, food and fertilizer subsidies are likely to be much higher and the deficit could exceed target.

“If we cut capex with short-term concerns in mind, then we will hurt long-term growth. This will affect committed projects across multiple sectors such as roads, railways,” Somanathan said, adding that there will be no budgetary constraints on capex.

However, other sources in the government said that while capital spending may not be cut, fiscal policy in general will support the RBI in managing inflation.

Some revenue spending may be redeployed, an official said, which would ensure overall spending does not rise sharply and undermine the RBI’s monetary policy, ruling out any possibility of a sharp cut in spending as earlier, as incomes are comfortable of.

“This is not a dire situation,” the official said. “There may be some cuts in income spending, but not the same amount.”

There is also a debate among policymakers about cutting fuel taxes, officials said. They may lower retail prices in the short term but boost demand elsewhere and increase borrowing, running counter to the RBI’s efforts to drive down demand and cool inflation through monetary tightening.

The final decision on whether to cut taxes will be made after considering all comments at the highest level.

The central bank itself appears to be leaning towards reducing fuel taxes.

The Monetary Policy Committee said: “Central and state taxes are active and likely outweigh any subsidy cost increases due to the Ukraine crisis, giving them room to cut fuel taxes. Countercyclical fuel taxes are important to prevent a ratcheting effect from raising inflation. is necessary,” the Reserve Bank of India said in its last review record released on Wednesday.

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