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The Finance Ministry admitted that the increase in standard excise duty proposed in the Budget may add to inflation, but only a “little bit.”
However, it believes with such a fiscal action, there is strong case for reducing interest rates.
Mr R.S. Gujral, the Finance Secretary, said, “The issue is how much of the hike is passed on to the consumer. Usually 50 per cent of the increase is passed on. So there would be some upward change in inflation.” However, this would be short-term impact. We need to understand that long-term impact on fiscal deficit would be more than short-term impact on inflation, he added.
The Finance Minister in his speech said, “Though the February 2012 inflation figure has gone up marginally, I expect the headline inflation to moderate further in the next few months and remain stable thereafter.”
Now will the Reserve Bank of India budge as the Finance Ministry has taken fiscal measures? The Economic Affairs Secretary, Mr R. Gopalan, said that with growth in manufacturing inflation coming down, there was a “strong case for reducing interest rate,” he said.
In order to check inflation, the RBI increased the interest rate (by way of repo and reverse repo) for 13 times consecutively.
However, it reduced the cash reserve ratio (CRR) twice and released over Rs 80,000 crore into the system. Now the industry is waiting for the rate cut.
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