Will Pranab’s Budget Stoke Inflation?

• Sunday, February 28th, 2010

Finance Minister Pranab Mukherjee’s Budget 2010 is, no doubt, aimed at raising the GDP growth rate and narrowing the widening fiscal deficit. Even as questions are being raised on the efficacy of budget proposals in these fronts, their effect on the spiralling inflation, including food price inflation is a matter of serious concern.

Some of the budgetary proposals that may push inflation further are 2% increase in excise duty and restoration of customs duty on petroleum products. Both have pushed petrol and diesel prices by Rs. 2.71 and Rs. 2.55 respectively a litre with immediate effect.

The increase in diesel price is bound to have cascading impact on food prices. Not only would the transportation become costlier, this would raise the transportation cost of all commodities, which in turn would impact their prices and thus inflation.

Pranab Mukherjee concedes in post-budget interactions that some of the budgetary provisions may stoke inflation. He justifies his actions saying that these ‘risks’ were inevitable to set the economy on a higher growth path.

Mukherjee said, “I do agree that my tax proposals will have some inflationary ingredient and we have calculated it will be about 0.41 per cent. But in course of time it will be absorbed.”

He stressed the importance of GDP growth over price inflation while preparing budget. “I feel that the fundamentals of the economy are strong. The positives outweigh the negatives and growth will soon breach double digit barriers,” he said while addressing industry chamber FICCI.

He blamed the inadequacy of public distribution system for food price inflation. He said that food price inflation needs to be harnessed by bettering the supply-demand mechanism and not through fiscal measures.

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