India Unveils $26 Billion Inflation Plan, Risks Higher Borrowing

(Bloomberg) -- India unveiled inflation-fighting fiscal measures estimated to cost $26 billion that includes lower fuel taxes and import levies, raising speculation the government will expand its bond borrowing program and potentially easing pressure on the central bank.

The measures announced over the weekend by Prime Minister Narendra Modi’s administration come after inflation climbed to an eight-year high, driven by commodities and supply-chain shocks, and the Reserve Bank of India began raising interest rates for the first time in almost four years.

Yields on the benchmark 10-year notes were steady, after earlier rising as much as six basis points, while the rupee lost 0.1%. Shorter-term bonds gained, reflecting expectations that the moves will help ease inflation and keep large rate hikes in check.

“If inflation is attacked also by the government now, and there is a feeling that there is a two-pronged approach to control inflation both from the monetary and fiscal side, then the market may not expect as many rate hikes,” said Vijay Sharma, senior executive vice president at PNB Gilts. That “will have a soothing impact on the front end of the curve,” he said.

India joins policy makers globally who are struggling to slow a surge in consumer prices that threatens their recoveries from the pandemic and risks tipping many economies back into recession. 

As part of India’s plan to ease pressure on consumers, the federal government slashed levies on pump prices of gasoline and diesel, waived import tax on coking coal, which is used to make steel, and increased subsidies on fertilizers and cooking gas. 

“The new measures could play a key role in easing price pressures,” Rahul Bajoria and Sri Virinchi Kadiyala at Barclays Plc wrote in a report to clients Sunday, adding that the central bank will likely still maintain its path toward tighter monetary policy.

The lost revenues and higher spending are expected to add to the record borrowing program already undertaken by Modi’s government.

‘Fiscal Slippage’

The new measures are estimated to cost 2 trillion rupees ($26 billion), analysts at Nomura Holdings Inc. wrote in a note Sunday, adding that this will push the budget deficit for the current year to 6.8% of gross domestic product, from the originally budgeted 6.4%. 

“Fiscal slippage now appears inevitable,” Nomura analysts wrote.

The revenue hit from the fuel tax will likely result in an extra 1 trillion rupees of government borrowing, according to people familiar with the matter.

The government’s steps follow a recent shift toward inflation fighting by the RBI, which announced a surprise rate hike earlier this month. The central bank is expected to continue raising rates as prices are forecast to cruise above its 2%-6% target for much of the year. 

“Fiscal and monetary authorities are presenting a unified front in their fight against inflation,” Samiran Chakraborty and Baqar Zaidi at Citigroup Inc. wrote in a note Sunday.

India had earlier budgeted to raise about 14.3 trillion rupees through debt issuances in the financial year through March 2023. The entire borrowings are in local currency, with banks and insurance companies the biggest buyers of sovereign debt.

(Updates to add market reaction in third paragraph, adds comment in fourth paragraph.)

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