Why Budget 2022 is unlikely to stoke inflation

The Union Budget for 2022-23 is seen as inflation neutral though it envisages a large step-up in expenditure during the year. However, the country could face the risk of imported inflation if crude oil prices remain elevated but economists say that there was little the budget could have done to assuage those worries.

Volatility in petroleum product prices is largely determined by exogenous factors such as geopolitics and supply disruptions. The latest flare-up in prices has been caused by worries of a Russian invasion of Ukraine as well as supply disruptions in some oil-producing countries.

While lowering duties on petroleum products can cool inflation and provide some relief to consumers, it was felt that such measures are best taken outside the budget, as was done last November. The Union government had reduced excise duties of petrol and diesel by Rs 5 and Rs 10, respectively, and state governments lowered the value-added tax to bring down soaring retail prices of the two fuels.

“Why make a pre-commitment in the budget and be bound by it? The government can take ad hoc administrative measures outside the budget if the need arises,” said Yuvika Singhal, economist with QuantEco Research, a strategic financial and economic advisory firm.

Most of India’s imported inflation would come from high crude oil, given that the nation imports about 80 percent of its requirement. High input prices of other commodities are part of business cycles that companies have to deal with, Singhal added. In any case, companies have been passing on the impact of higher prices to customers in a calibrated manner and they will continue to do so as demand recovery becomes meaningful.

NR Bhanumurthy, vice-chancellor of Dr BR Ambedkar School of Economics University, felt that the government has not been reckless about its spending plans. Therefore, the budget would not add to the inflationary pressures in the economy.

However, Bhanumurthy warns that the recalibration of the customs duties on intermediate goods might have some inflationary impact. “The changes in the customs duties is slightly messy. Net, net, it may impact the cost of production.”

On the stepping up of expenditure, Bhanumurthy notes that the big increase in capital expenditure was unlikely to be inflationary. The budget is focused on long-term growth and the spending would be spread over the months.

Singhal said that while pickup in economic activities such as the construction of a large network of roads could increase demand, it would not result in higher inflation in the short term.  The budget is inflation neutral and assuages concerns of the perpetuation of demand-side inflation, she said.