Budget may lower import duty on inputs to cool nflation, support Atmanirbhar Bharat

The government is looking at ways to bring down core inflation through duty revision measures in the Union Budget.

Increase in the cost of doing business can inflate the prices of goods and create a situation which hits the common man more starkly than others. This would leave the government with limited options, including boosting economic growth, increasing infrastructure investments and creating jobs.

The pandemic has led to simultaneous demand and supply shocks, and to soften the impact, the government is looking at lowering the import duty on external inputs, such as metals, and components, among others. “Commerce and Industry Ministry has identified a number of items for duty revisions. Some announcement on duties may come in the Budget,” a government official hinted.

Also read: Wholesale inflation down to 1.22% in December

However, sources in the Petroleum Ministry remained non-committal on whether or not excise duty on fuel will be cut. Higher fuel prices are adding to input costs. “The factual position is known to the Finance Ministry; now it is up to them,” an official told BusinessLine.

But, one thing is clear: efforts will be made to bring down the cost of doing business, since that has a share in core inflation.

Core inflation measures price changes in goods and services, excluding those from food and energy and represents the long-term trend. For the month of December, headline inflation (including price trends of volatile food and energy products) dipped to a 14-month low of 4.6 per cent, but core inflation (CPI excluding food and fuel) remained elevated at 5.5 per cent. It had exhibited a small moderation from the November reading of 5.7 per cent. This was the eighth month of 5 per cent plus core inflation.

In fact, RBI, in its January bulletin, said that price pressures in respect of CPI core components are likely to remain in place. PMIs for manufacturing and services sectors point to an intensification of input price pressures in December. This is due to rise in prices of fuel, industrial metals, and edible oil, and increased cost of doing business in the post-lockdown situation. “In a scenario where demand conditions are getting normalised and firms are regaining pricing power, this poses the risk of higher pass-through of rising input costs to output prices,” it said.

According to L Viswanathan, Partner at Cyril Amarchand Mangaldas, “Although recent budgets have indicated increases in import duties, the government’s articulation of ‘Atmanirbhar’ as well as India taking its place in the global supply chains seem to point towards a reduction in import duties for inputs and raw materials to ensure lower input costs for both domestic consumption as well as exports.”

Measures to improve competitiveness and ease of doing business will probably include rationalisation of regulation and legal and regulatory reform, consolidation and continuation of multiple reforms in financial services, infrastructure, labour and education.

The industry feedback to the Finance Ministry has been that there is a need for a relook at import bans, custom duties, anti-dumping duties and various bilateral treaties. At a recent meeting with Prime Minister Narendra Modi ahead of the Budget, which is to be presented on February 1, top economists made a case for taking a close look at import tariffs.

“Ease of doing business and attracting manufacturing and services to India must remain high on the agenda of the government. Price controls are market distorting and will probably be avoided,” Viswanathan said.

Sanjay Kumar, Partner at Deloitte India, said that input costs could relate to the cost of fuel, electricity, and logistics, among others. It is often said that China’s logistics cost is a third of India’s. That itself presents a huge disadvantage for India. Infrastructure development is the answer to that problem. Most of the MSMEs use electricity. “Getting quality supply, and pricing which respects economies of scale, can help them reduce their input costs and become far more viable,” he said, adding “It is important to correct both supply side and demand side. Businesses need to be opened up.”

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