Union Budget 2010-11 likely to cause price rise

Written by ASHOK B SHARMA | Updated: Feb 27 2010, 23:26pm hrs
The Union finance minister, Pranab Mukherjees budgetary proposals for the year 2010-11 may help the economy to achieve the magic growth figure which is targeted at 8.5%, but little it can do to vanish the price inflation worries. In fact certain proposals in the Budget would lead to further rise in prices of essential commodities.

The proposal to restore the basic customs duty of 5% on crude petroleum, 7.5% on diesel and petrol and 10% on other refined products is not a wise decision in the public interest at this juncture. Further the levy of Rs one per litre as central excise duty on petrol and diesel has added to the problem.

In an attempt to justify his decision the finance minister has said that the roll back of customs duty on these products was done in June 2008 when the global prices were ruling at around US$ 112 per barrel and now as the prices have softened and there was the pressing need to move back to a fiscal consolidation path these measures were necessary.

The global prices of crude oil had softened in the wake of the global financial crisis, but now it has shown a rising trend. Currently the global prices are hovering around US$ 80 per bbl. As India depends upon crude oil imports to the extent of 70%, these measures of the government would definitely translate into further price inflationary pressure on the economy.

Following the announcement of the budgetary proposals, the Indian oil companies have decided to upscale the prices. Diesel prices in Delhi is likely to increase by Rs 2.55 and that of petrol by Rs 2.71 a litre. Thus not only public transport would become costlier, but also the transportation of essential commodities.

Already the country is reeling under the impact of soaring prices. The food price inflation is at 18%. The government has admitted that the present trend in inflation is led by food prices. There is a wide divergence in the wholesale and retail prices and the government is not sincere in bridging this gap. The Reserve Bank of India has projected that the price inflation rate measure by the movement of wholesale price index would touch 8.5% by the end of March, this year. Thereafter entering a double digit percentage zone would not be a distant possibility. Last year the monsoon failure took a toll on agriculture production. God forbid it does not happen this year!

Another folly in the budgetary proposal is to increase the customs duty on gold and platinum from Rs 200 per 10 grams to Rs 300 per 10 grams and on silver from Rs 1,000 per kg to Rs 1,500 per kg. Following the global financial crisis the stock markets suffered worldwide and the investors started investing in the commodity markets, particularly in gold. This caused the rise gold prices and the spillover effect was on the prices of other commodities as well.

Gold has now become an important area for investment and in India, particularly the attachment to this precious metal is due to the cultural ethos.

Today Indian market often move in parallel to the global market. We also import price inflation. By making gold costlier in the country is not a wise step. It may have spillover effect on other commodities on the lines of the global market.

The Budget has reduced the basic customs duty on gold ore and concentrates from 2% ad valorem to a specific duty of Rs 140 per 10 gram of gold content with full exemption from special additional duty. The excise duty on refined gold made from such ore or concentrate is reduced from 8% to a specific duty of Rs 280 per 10 gram. But these measures are too little to undo the impact caused by the hike in customs duty on gold.

If fiscal consolidation is the worry for the government, it should have taken measures to mobiles resources from other sectors of the economy. The government has given stimulus packages and incentives to the industry and now as the manufacturing sector has registered 8.9% and has become resilient to the adverse impact of the global financial crisis, some of these incentives could have been withdrawn in a calibrated manner.

Some reforms in the tax regime, moving towards a transparent subsidy regime, capitalisation of public sector banks and regional rural banks, interest subvention on farm loans, interest subvention on exports of handicrafts, carpets, handlooms and products of small and medium industries, measures for promoting farm growth, investments in infrastructure and social sectors and attempts to bring in reforms in the governments delivery system and overall the investment in environment-related areas are among the welcome measures suggested in the Budget.