India to Withdraw Fiscal Stimulus

Seeing a recovering gross domestic product growth rate of 8.9 percent in the third quarter (September to December) of fiscal 2010, and a surging inflation rate of 12.1 percent last year, India is considering rolling back the fiscal stimulus in order to reduce the government’s financial deficit and curb inflation.

While answering a Parliament question on February 22, Namo Narain Meena, minister of State for Finance, said that both the withdrawal of fiscal stimulus and the Reserve Bank of India’s measures to control excess liquidity will be helpful to the Indian government who is trying to restrict inflation.
State governments were also advised to crack down on hoarding and black marketing of essential commodities in the hope of pinning down the prices of food and other commodities that are crucial for maintaining basic living standards.

However, a recent report on Times of India worries that other products such as consumer durables may become more expensive, due to the high speculation on a 2 percent excise duty increase that comes with the alteration in India’s economic policy. The report pointed out that it is almost certain an excise hike will take place in the auto sector, according to experts.

Consumer goods makers are apprehensive of seeing shrinkage in their profit margin if they will have to carry a heavier excise burden, in addition to bearing the input costs that have already stood high over the past one year.

Several fast moving consumer goods producers believe the increase in excise levy will only stretch consumers’ budget and exacerbate inflation.

“If the budget announces an increase in duties it will affect the end consumer who is already stretched as far his budgets go,” said KK Modi, chairman of the famous tobacco company Godfrey Phillips India, hoping that there will be no excise duty increases for tobacco.

Durables and electronics companies say that a higher excise duty will impact the current robust growth in the industry adversely. A top executive with a consumer durable company commented to the Times of India that “the move will be detrimental, and pull down growth.”

Thanks to the stimulus and favorable taxes given to the industry in 2009, the industry’s double-digit growth rate contributed significantly to the country’s total economic recovery last year. However, the metal price surge since August last year has been squeezing its profit margin.

Deputy MD of Samsung India R Zutshi said they are looking forward to some supportive policies from the government to boost domestic manufacturing, while the surging costs are becoming a disadvantage to them.

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