The Finance Secretary, TV Somanathan, stated that the Centre would not cut its Capital Expenditure (CAPEX) in the current financial year amid suggestions from experts that fiscal policy should aid monetary policy to manage inflation.
The government has budgeted Rs.7.5 lakh crore CAPEX in FY23 compared with a revised Rs.6.03 lakh crore CAPEX in FY22. The Finance Secretary stated that the government would continue with the committed CAPEX. He also noted that capital investment is required for the economy’s long-term growth, and short-term developments should not distract from that goal.
The Reverse Bank of India (RBI) raised the repo rate by 0.4% point to 4.4% earlier this month to manage inflation that increased to 7.79% in April. The Central Government has budgeted a fiscal deficit of 6.8% GDP in FY23. Still, the fiscal deficit may exceed the target as food and fertiliser subsidies will be higher due to the Ukraine conflict.
The Finance Secretary stated that if the government curtails CAPEX because of short-term issues, it will impact committed projects across various sectors such as railways and roads. There would be no budgetary constraints on capital spending. However, other government sources stated that while the government may not cut CAPEX, the fiscal policy will support the RBI in managing inflation.
The RBI is in favour of a reduction in taxes on fuels. The central and state taxes are buoyant and likely to exceed the rise in subsidy costs due to the Ukraine crisis, giving them space to cut fuel taxes. The RBI’s monetary policy committee noted in the minutes of the last review, released on Wednesday, that countercyclical fuel taxes are essential to prevent a ratchet effect raising inflation.
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