The Indian government is reportedly considering reducing taxes on certain items, such as maize and fuel, in response to the central bank's recommendations to curb rising retail inflation. Sources familiar with the discussions revealed that the decision will be taken after the release of February's inflation data, reported Reuters.
According to data released this week, India's annual retail inflation rate rose to 6.52 percent in January from 5.72 percent in December. This has sparked concerns among policymakers and economists who fear that inflation could spiral out of control, potentially damaging the country's economy.
One senior source said that "food inflation is likely to stay high, prices of milk, maize and soy oil are adding to inflation worries in the near term." As a result, the government is looking at reducing import duties on products such as maize, which attracts a 60 percent basic duty, while taxes on fuel could also be lowered.
Also read: With inflation varying, economists say RBI rate hikes haven't affected consumer spending much
Although the price of crude oil has eased and stabilised globally in recent months, the lower import costs have not been passed on to customers or businesses striving to recover from previous losses.
India imports more than two-thirds of its oil needs, thus a tax decrease by the central government may encourage pump operators to pass the benefits along to retail customers, thereby lowering inflation.
January's retail inflation was above the Reserve Bank of India's (RBI) upper target limit of 6 percent for the first time since October.
"We have some recommendations from them (central bank) which is a usual practice," a second source said.
"This has been one of the ways in which government and RBI has coordinated to create a stable macroeconomic environment. Fuel and maize are part of duties. We will probably wait for at least one more print before we decide on these," he added.
The RBI's hawkish monetary policy tone last week and the CPI shocker earlier this week have led to a substantial increase in calls for another rate hike, although the opinion is not shared by everyone.
Madan Sabnavis, chief economist at Bank of Baroda, said in a note that "the RBI's decision and stance remain vindicated by this number, and it would be fair to surmise that if inflation remains above the 6 percent mark in the next couple of months, there could be a further rate hike considered."
However, he added that the probability of a hike was low, and there was scope for the federal and local governments to consider lowering taxes, particularly for fuel, to curb inflation.
With inputs from agency
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