India expects sentiment to revive as interest rates fall
Decision to increase taxes to 12% from 10% may spur price pressures
New Delhi: Finance Minister Pranab Mukherjee said he expects India's central bank to reduce interest rates, helping revive sentiment after economic growth slowed.
"I expect policy rates to be reversed by the central bank in coming months," Mukherjee said at a conference in New Delhi yesterday. "That should improve sentiment."
The minister said in his March 16 federal budget that India's economic expansion may revive to as much as 7.85 per cent in the fiscal year starting April 1 and that inflation will ease. At the same time, he acknowledged on Saturday that his decision to increase the service and excise taxes to 12 per cent from ten per cent may spur some price pressures.
The Reserve Bank of India signalled before the budget that better control of the nation's fiscal deficit would boost scope to lower borrowing costs, which are at the highest level since 2008, at 8.5 per cent. The RBI raised the repurchase rate by a record 3.75 percentage points from 2010 to October last year to fight price increases, with February's 6.95 per cent inflation rate holding close to a 26-month low.
"Inflationary pressures need to be at a moderate level in the next financial year," Mukherjee said. "I am not talking about a four per cent level; 6 to 6.5 per cent will be an acceptable level."
Subsidy programme
In the budget speech, Mukherjee forecast a narrowing in the fiscal gap to 5.1 per cent of gross domestic product in the next financial year. He said the shortfall for the year through March 31 will be 5.9 per cent, wider than the 4.6 per cent target set a year ago.
Aside from tax increases, Mukherjee proposed restricting a subsidy programme spanning diesel to fertilisers to less than two per cent of GDP, beginning in the year to March 2013. The budget also proposed changing laws so India can retrospectively tax capital gains by foreign companies.
Economic growth moderated to 6.1 per cent last quarter from a year earlier, the slowest pace in almost three years, as costlier credit hurt consumer spending and dented investment.
