INDIAN GOVERNMENT CUTS TAXES ON FUEL AND COMMODITIES TO FIGHT INFLATION

Congress workers protest outside the Ministry of Petroleum in New Delhi against the rising prices of petrol, diesel and LPG gas cylinders- March 02-2021

Mon 23 May 2022:

In an effort to insulate consumers from rising prices amid high inflation, India has proposed a series of modifications to the tax structure imposed on essential items.

On Saturday, Finance Minister Nirmala Sitharaman announced a drop in excise duty on gasoline of 8 rupees ($0.1028) per litre and diesel of 6 rupees ($0.07) per litre.

She warned in a series of tweets that the new tax regime on fuel and diesel could result in the government losing roughly 1 trillion Indian rupees ($12.8 billion) in annual revenue due to lower collection.

The government also removed the import duty on anthracite, PCI coal and coking coal in a bid to reduce raw material costs for local market demand.

The latest measures will be effective from May 22, the government said in a notification after the announcement by Sitharaman, who also urged state governments to follow suit with similar reductions on fuel prices keeping in line with federal plans.

A litre of petrol currently costs 105.41 rupees ($1.35), while diesel is at 96.67 rupees ($1.24) in New Delhi.

The government will also provide a new subsidy of 200 rupees ($2.5) per cooking gas cylinder to more than 90 million beneficiaries under a welfare scheme introduced for women below the poverty line.

The subsidy will have an annual revenue implication of nearly 61 billion Indian rupees ($785.6m), Sitharaman said.

“Prime Minister Narendra Modi has specifically asked all arms of the government to work with sensitivity and give relief to the common man,” she said.

The government was also working to reduce taxes on raw materials for plastic products to lower the cost of final products.

Experts said the latest moves will likely increase fiscal concerns and raise doubts about the government meeting its deficit target of 6.4 percent of GDP for 2022-2023.

Inflation has become a major headache for Modi’s government ahead of elections to several Indian state assemblies this year.

The sharp jump in inflation meant input costs escalated for businesses and the rise prompted the central bank to raise interest rates at an unscheduled policy meeting this month.

Last week, the Indian rupee weakened sharply against the US dollar hitting a fresh all-time intraday low of 77.69 as weak economic data from China stoked fears of a global recession, eroding appetite for riskier emerging market currencies, according to forex analysts.

But what has caused the decline of the Indian rupee?

The value of any currency depends on its demand in the market. If the demand increases, its value goes up, which is known as appreciation. And if the demand for a currency declines, its value depreciates.

If more foreign investors invest in Indian businesses and projects, the demand for Indian currency goes up. To be able to invest in India, foreign companies have to first convert their currency into Indian rupees. This increase in demand for the rupee strengthens its value against the US dollar.

Recently, more and more overseas investors have pulled out a big chunk of their money from the Indian market, consequently affecting market sentiment and currency’s decline.

SOURCE: INDEPENDENT PRESS AND NEWS AGENCIES

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