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‘MGNREGA workers not likely to own 4-wheelers’: CEA on why Modi govt unlikely to cut fuel tax

In an interview to ThePrint, CEA Krishnamurthy Subramanian explains reasons behind the govt opting to reduce taxes on imported food items like edible oil but not on petrol or diesel.

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New Delhi: The Narendra Modi government is unlikely to cut taxes on petrol and diesel, Krishnamurthy V. Subramanian, Chief Economic Adviser in the Union Ministry of Finance, hinted Friday.

In an interview to ThePrint, Subramanian also said inflation based on the consumer price index (CPI) is likely to ease below 6 per cent in July or August, which had been well above that mark in May and June.

The CEA further noted that the contribution of food inflation to CPI inflation is almost eight times more than fuel’s contribution.

“Food inflation contributes to almost 50 per cent of CPI inflation and is the biggest contributor to headline inflation. In contrast, the direct weight of petrol and diesel is basically about close to 3 per cent. There are second order effects as well. When petrol and diesel prices go up, transportation costs go up and this may increase the cost of production of firms. Taking all this into account, the weight comes to about 6 per cent,” he said.

Subramanian added: “Any policy measure always involves trade-offs and I have explained what is the biggest contributor to inflation. You have to actually balance those tradeoffs and see what’s the cost and the benefit. Our assessment has been based on that evaluation.”

The CEA’s indication that the Modi government is not likely to cut taxes on petrol and diesel comes after the monetary policy committee had explicitly asked the government to do so to ease inflationary pressures in a review in June.

However, the government has been resisting reducing taxes despite a sharp increase in prices across India in the last couple of months due to a steep hike in international crude oil prices.

Prices of petrol have been over Rs 100 per litre in many states over the last few weeks with taxes levied by the central and state governments together accounting for about 58 per cent of the retail selling price.

However, the government has cut import duty on palm oil after edible oil prices rose sharply globally.

Answering a question on why the government has cut import duty on edible oil but not excise duties on petrol and diesel, Subramanian explained the government’s thinking behind it and said: “One thing that has to be kept in mind is that MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) workers or those availing subsidised food grains under the National Food Security Act are unlikely to have a four-wheeler.”

Also read: $97 mn in 1991 to $82 bn in 2021 — how reforms made India a go-to destination for FDI

Inflation will fall below 6 per cent

Subramanian also said inflation is likely to moderate in the coming months as pressures on the supply side ease.

“If you take the first wave of the pandemic, for nine months, the inflation was around 6 per cent. And that was because of the supply side frictions that manifested during the first wave. The duration of the second wave has been much shorter and the restrictions have been heterogeneous across states. It has been asynchronous in time as well. In almost all states, the essentials have not been impacted as much and the interstate movement has continued,” he noted.

“The higher inflation print now is because of the supply side frictions from the second wave but they are not likely to last as long. I expect that either July or August print will be below 6 per cent,” Subramanian added.

India’s inflation has been over 6 per cent in both May and June, well above the 2-6 per cent inflation range that the Reserve Bank has to target as part of the monetary policy framework.

Also read: If we raise duties to make Indian industry competitive, we’ll end up close to 1991: Montek


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