Home Finance News Centre won’t trim its Capex plan despite inflation running hot

Centre won’t trim its Capex plan despite inflation running hot

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The government will not cut capital expenditure in the current fiscal year, finance secretary TV Somanathan said, amid suggestions by experts that fiscal policy should aid monetary policy in managing inflation.

He said capital investment is needed for the long-term growth of the economy and short-term developments should not distract from that goal. The government has budgeted ₹7.5 lakh crore capital expenditure in FY23 compared with a revised ₹6.03 lakh crore capex in FY22.

“We will continue with the committed capex,” Somanathan said.

In a surprise move, the Reserve Bank of India (RBI) had earlier this month raised the repo rate by 0.4 percentage point to 4.4% to tame runaway inflation that hit an eight-year high of 7.79% in April.

The Centre has budgeted a fiscal deficit of 6.8% of GDP in FY23 but with food and fertiliser subsidies likely to be much higher owing to the Ukraine conflict, the fiscal deficit may exceed the target.

“If we curtail capex in view of the short-term issues, then we will hurt the long-term growth. It will impact committed projects in multiple sectors such as roads, railways,” Somanathan said, adding that there will be no budgetary constraints on capital spending.

However, other sources in the government said that while capex may not be cut, the fiscal policy will in general support the RBI in managing inflation.

Debate Over Fuel Tax Cuts

There could be redeployment of some revenue expenditure, which will ensure overall spending does not rise sharply and undermine the RBI’s monetary policy, said one official, ruling out any sharp expenditure cuts as done earlier as revenues were comfortable.

“It is not a dire situation,” the official said. “There could be some cut in revenue expenditure but not with the same intensity.”

There is also debate among policy makers over fuel tax cuts, officials said. They may cool retail prices in the short run but increase demand elsewhere, swell borrowing and run counter to the RBI’s efforts to push down demand and cool inflation with monetary tightening.

A final call on any tax cut will be taken after considering all views at the highest level.

The central bank itself seems to favour a reduction in taxes on fuels.

“Both central and state taxes are buoyant and likely to exceed any rise in subsidy costs because of the Ukraine crisis, giving them space to cut taxes on fuels. Countercyclical fuel taxes are necessary to prevent a ratchet effect raising inflation,” the monetary policy committee of the RBI noted in the minutes of the last review released on Wednesday.

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