To Reduce Inflation, Centre May Consider Lowering Fuel And Maize Taxes

According to two sources familiar with the discussion to Reuters, the Indian government may consider lowering taxes on some items such as maize and fuel in response to the central bank's recommendations to help rein in rising retail inflation.

According to one of the sources, a decision will be made only after the release of February inflation data. As per data released this week, India's annual retail inflation rate increased to 6.52% in January from 5.72% in December.

"Food inflation is likely to remain high, with milk, maize, and soy oil prices adding to inflation concerns in the near term," said a senior source familiar with the central bank's and government's thinking on the subject.

The insider went on to say, "The administration is considering lowering import tariffs on goods like maize, which carries a 60% basic tariff, as well as perhaps lowering gasoline prices."

The finance ministry and the Reserve Bank of India (RBI) of India did not immediately respond to Reuters' questions.

Despite the recent decline and stabilisation in the price of crude oil on a worldwide scale, fuel firms have not passed on the lower import costs to customers or businesses looking to make up for prior losses.

India imports more than two-thirds of its oil needs. A central government tax cut could encourage pump operators to pass on the savings to retail customers, lowering inflation.

For the first time since October, retail inflation in January exceeded the RBI's upper target limit of 6%, and it was significantly higher than the 5.9% predicted by 44 analysts polled by Reuters.

A second person stated, "We have some advice from the central bank, which is a usual practice."

"This is one way the government and RBI have worked together to create a stable macroeconomic environment. Fuel and maize are among the responsibilities. We'll probably wait for at least one more print before deciding on these "He went on to say.

Though calls for another rate hike have risen sharply in the aftermath of the RBI's hawkish monetary policy tone last week and the CPI shocker earlier this week, this is not a widely held opinion.

According to Madan Sabnavis, chief economist at Bank of Baroda, "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% mark in the next couple of months, there could be a further rate hike considered." However, he added that the likelihood of a hike was low.

In order to reduce inflation, he claimed there was room for the federal and municipal governments to explore decreasing taxes, particularly on fuel.

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