NEW DELHI: Worried about rising prices of essential commodities, the Indian government and central bank are doing their best to contain inflation. Tall inflationary affects the economy when a person’s purchasing power goes down, affecting the demand for goods and services. Prices of everyday household items also increased significantly. From September 2021 to April 2022, consumer food price inflation in India increased from 0.68% to 8.38% year-on-year. India’s retail inflation rose to an eight-year high of 7.79% in April while inflation based on the Wholesale Price Index rose to more than 15% in April.
Even the global growth outlook looks bleak as geopolitical tensions linger, commodity prices are still rising, and shelter-in-place withdrawals are accelerating. Emerging economies face the risk of capital outflows and higher commodity prices leading to inflation.
Reserve Bank of India (RBI) was forced to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40% earlier this month, while Center announced a series of measures to cool down inflation.
Fiscal measures: Cut excise tax on gasoline and diesel
Fiscal measures include a reduction in excise tax on gasoline of Rs 8 per liter and diesel at Rs 6 per liter, along with a reduction in customs duties on raw materials such as plastics and steel, and an increase in export duties. for iron ore and steel. . The excise tax cuts will reduce the price of petrol by Rs 9.5 per liter and diesel by Rs 7 per liter (state VAT included).
LPG Subsidies
In addition, over 90 million Pradhan Mantri Ujjwala Yojana beneficiaries will receive a subsidy of Rs 200 per LPG cylinder for up to 12 refills in a year; The revenue impact of this measure is approximately Rs 6,100 crore a year.
A reduction in the excise taxes on automotive fuel will immediately result in a reduction in the state VAT as levied on an inclusive basis by the Center. Finance Minister Nirmala Sitharaman asked the state governments, especially those states that did not cut the VAT rate after the last excise tax cut in November 2021, “also make a similar cut. self-help and relief for the people”.
Fertilizer Subsidies
To cushion the impact of rising global fertilizer prices due to ongoing geopolitical tensions between Russia and Ukraine, the government has also announced an additional subsidy of Rs 1.10 lakh crore and a higher Rs 1.05 crore. lakh crore is provided in budget. With this, the total government fertilizer subsidy is likely to hit a record 2.15 lakh crore RS in the current 2022-23 fiscal.
“Despite rising fertilizer prices globally, we have protected our farmers from such price spikes. In addition to a fertilizer subsidy of Rs 1.05 lakh crore in the Budget, an additional amount of ₹1. 10 lakh crore is being offered to further support our farmers. Sitharaman tweeted.
India imports urea, potash and phosphate fertilizers.
Cement: Steps are also being taken to improve the availability of cement through better logistics.
Ban on wheat exports
On May 14, India announced a ban on wheat exports in hopes of bringing stability to the peak of wheat prices amid supply disruptions due to the Russia-Ukraine war. The world’s second-largest wheat producer banned private sales of the grain abroad on May 14 after a severe heatwave slashed output and domestic prices hit record highs. Global wheat prices rose sharply after this decision. India has no plans to revisit the export ban, although International Monetary Fund (IMF) Director Kristalina Georgieva has begged India to reconsider its wheat export ban, saying it could close a ban. important role in international food security and global stability.
Exports are only allowed on a government basis allowing other countries to meet their food security needs based on government requests. The wheat export ban will help cool down the price of wheat and bring it closer to the MSP. This can reduce the price of flour in the market.
Tax-free imported cooking oil
The government has allowed the import of 200,000 tons of crude soybeans and sunflower oil per year for two years at zero duty. It also cut the basic customs duty on crude palm oil to 10% until September.
The price of cooking oil is increasing due to the Russo-Ukrainian war, as both countries are major exporters of this commodity.
In India, 85-90% of soybean oil and sun oil are used directly in home kitchens while the remaining 10-15% are used in the food industry, mainly in the packaged food segment. such as instant food, pies, snacks, pickles, dressings and sauces. So with zero tariffs on soybeans and sun oil retailers, consumers are expected to benefit the most.
“As all cooking oil prices are closely correlated, a reduction in tariffs on soybean oil and solar oil will put downward pressure on palm oil prices in the coming months. Around 50-55% of the volume Domestic imported palm oil is consumed at the industrial level and within industrial use HORECA and Food processing industry accounts for a large proportion of ~85-90% of total industrial consumption. In food processing, palm oil is mainly used in, Industrial frying fat, Confectionery, Ice cream, Some non-dairy ice cream makers, salad dressing According to industry estimates, the industrial frying fat segment accounts for a large proportion. 25-30% of total palm oil is consumed in the food processing industry, a small part also goes in non-edible FMCG industries such as personal care, cosmetics, toiletries and cleaning products,” said Pushan Sharma, Director, CRISIL Research.
Ban on sugar exports
The government has restricted sugar exports and put it on a ‘restricted list’ since June to make the availability of sugar in the domestic market easy and check for price increases.
India is the world’s largest sugar producer and the second largest exporter after Brazil. The country has recorded its highest sugar exports so far in six years.
“According to DGFT’s order, valid from June 1, 2022 to October 31, 2022, or until another order, whichever is earlier, the export of sugar will be authorized with the specific permission of the Directorate of Sugar, Department of Food and Public Distribution,” a government notice said.
These restrictions will not apply to sugar exported to the EU and US under CXL and TRQ, the notice added.
The government has introduced a limit of 10 million tons of sugar exports for the period from June to October 2022. In addition, the government requires exporters to obtain permission from the Food and Public Distribution Department before sign any further export contracts during this time.
“According to industry estimates, even before this announcement, India’s sugar exports for the sugar season (SS) 2022 (October 21-September 22) were estimated to be ~9-9.5 million tons India exported 8.2 million tons SS 2022 sugar between October 21 and May 22. The domestic market price of sugar has taken into account this export volume and hence The introduction of the cap by the Government will not have a significant impact on sugar prices and exports through October 2022. Overall, sugar prices are expected to increase 10-11% y/y in the current season. at (October 2021 to September 2022) to ~Rs 35/kg.However, this move will to some extent limit exporters’ opportunity to profit from the increase in Pushan Sharma, Director of CRISIL Research, said global sugar prices.
The government is keen to help in managing inflation so that monetary tightening is kept to a minimum, as sharp increases in interest rates could derail the economic recovery. The RBI is expected to raise rates at its June policy meeting, and cumulative rate hikes for June and August are likely to be 75 basis points.
“The history of monetary and fiscal policy coordination in the Indian context for the 30-year period ending in FY 2020 shows a statistically insignificant negative correlation between the two, implying policy is least coordinated, even when RBI has successfully prevented automonetization and even issued new issues individually with RBI, with the issuance of FRBM in 2003. The best. What has emerged during the pandemic is the coordinated policy response of both the Government and the RBI in containing the pandemic and now inflation,” SBI noted in a report.
Even the global growth outlook looks bleak as geopolitical tensions linger, commodity prices are still rising, and shelter-in-place withdrawals are accelerating. Emerging economies face the risk of capital outflows and higher commodity prices leading to inflation.
Reserve Bank of India (RBI) was forced to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40% earlier this month, while Center announced a series of measures to cool down inflation.
Fiscal measures: Cut excise tax on gasoline and diesel
Fiscal measures include a reduction in excise tax on gasoline of Rs 8 per liter and diesel at Rs 6 per liter, along with a reduction in customs duties on raw materials such as plastics and steel, and an increase in export duties. for iron ore and steel. . The excise tax cuts will reduce the price of petrol by Rs 9.5 per liter and diesel by Rs 7 per liter (state VAT included).
LPG Subsidies
In addition, over 90 million Pradhan Mantri Ujjwala Yojana beneficiaries will receive a subsidy of Rs 200 per LPG cylinder for up to 12 refills in a year; The revenue impact of this measure is approximately Rs 6,100 crore a year.
A reduction in the excise taxes on automotive fuel will immediately result in a reduction in the state VAT as levied on an inclusive basis by the Center. Finance Minister Nirmala Sitharaman asked the state governments, especially those states that did not cut the VAT rate after the last excise tax cut in November 2021, “also make a similar cut. self-help and relief for the people”.
Fertilizer Subsidies
To cushion the impact of rising global fertilizer prices due to ongoing geopolitical tensions between Russia and Ukraine, the government has also announced an additional subsidy of Rs 1.10 lakh crore and a higher Rs 1.05 crore. lakh crore is provided in budget. With this, the total government fertilizer subsidy is likely to hit a record 2.15 lakh crore RS in the current 2022-23 fiscal.
“Despite rising fertilizer prices globally, we have protected our farmers from such price spikes. In addition to a fertilizer subsidy of Rs 1.05 lakh crore in the Budget, an additional amount of ₹1. 10 lakh crore is being offered to further support our farmers. Sitharaman tweeted.
India imports urea, potash and phosphate fertilizers.
Cement: Steps are also being taken to improve the availability of cement through better logistics.
Ban on wheat exports
On May 14, India announced a ban on wheat exports in hopes of bringing stability to the peak of wheat prices amid supply disruptions due to the Russia-Ukraine war. The world’s second-largest wheat producer banned private sales of the grain abroad on May 14 after a severe heatwave slashed output and domestic prices hit record highs. Global wheat prices rose sharply after this decision. India has no plans to revisit the export ban, although International Monetary Fund (IMF) Director Kristalina Georgieva has begged India to reconsider its wheat export ban, saying it could close a ban. important role in international food security and global stability.
Exports are only allowed on a government basis allowing other countries to meet their food security needs based on government requests. The wheat export ban will help cool down the price of wheat and bring it closer to the MSP. This can reduce the price of flour in the market.
Tax-free imported cooking oil
The government has allowed the import of 200,000 tons of crude soybeans and sunflower oil per year for two years at zero duty. It also cut the basic customs duty on crude palm oil to 10% until September.
The price of cooking oil is increasing due to the Russo-Ukrainian war, as both countries are major exporters of this commodity.
In India, 85-90% of soybean oil and sun oil are used directly in home kitchens while the remaining 10-15% are used in the food industry, mainly in the packaged food segment. such as instant food, pies, snacks, pickles, dressings and sauces. So with zero tariffs on soybeans and sun oil retailers, consumers are expected to benefit the most.
“As all cooking oil prices are closely correlated, a reduction in tariffs on soybean oil and solar oil will put downward pressure on palm oil prices in the coming months. Around 50-55% of the volume Domestic imported palm oil is consumed at the industrial level and within industrial use HORECA and Food processing industry accounts for a large proportion of ~85-90% of total industrial consumption. In food processing, palm oil is mainly used in, Industrial frying fat, Confectionery, Ice cream, Some non-dairy ice cream makers, salad dressing According to industry estimates, the industrial frying fat segment accounts for a large proportion. 25-30% of total palm oil is consumed in the food processing industry, a small part also goes in non-edible FMCG industries such as personal care, cosmetics, toiletries and cleaning products,” said Pushan Sharma, Director, CRISIL Research.
Ban on sugar exports
The government has restricted sugar exports and put it on a ‘restricted list’ since June to make the availability of sugar in the domestic market easy and check for price increases.
India is the world’s largest sugar producer and the second largest exporter after Brazil. The country has recorded its highest sugar exports so far in six years.
“According to DGFT’s order, valid from June 1, 2022 to October 31, 2022, or until another order, whichever is earlier, the export of sugar will be authorized with the specific permission of the Directorate of Sugar, Department of Food and Public Distribution,” a government notice said.
These restrictions will not apply to sugar exported to the EU and US under CXL and TRQ, the notice added.
The government has introduced a limit of 10 million tons of sugar exports for the period from June to October 2022. In addition, the government requires exporters to obtain permission from the Food and Public Distribution Department before sign any further export contracts during this time.
“According to industry estimates, even before this announcement, India’s sugar exports for the sugar season (SS) 2022 (October 21-September 22) were estimated to be ~9-9.5 million tons India exported 8.2 million tons SS 2022 sugar between October 21 and May 22. The domestic market price of sugar has taken into account this export volume and hence The introduction of the cap by the Government will not have a significant impact on sugar prices and exports through October 2022. Overall, sugar prices are expected to increase 10-11% y/y in the current season. at (October 2021 to September 2022) to ~Rs 35/kg.However, this move will to some extent limit exporters’ opportunity to profit from the increase in Pushan Sharma, Director of CRISIL Research, said global sugar prices.
The government is keen to help in managing inflation so that monetary tightening is kept to a minimum, as sharp increases in interest rates could derail the economic recovery. The RBI is expected to raise rates at its June policy meeting, and cumulative rate hikes for June and August are likely to be 75 basis points.
“The history of monetary and fiscal policy coordination in the Indian context for the 30-year period ending in FY 2020 shows a statistically insignificant negative correlation between the two, implying policy is least coordinated, even when RBI has successfully prevented automonetization and even issued new issues individually with RBI, with the issuance of FRBM in 2003. The best. What has emerged during the pandemic is the coordinated policy response of both the Government and the RBI in containing the pandemic and now inflation,” SBI noted in a report.
