The finance ministry is considering a proposal to increase excise duty from 10% to 12%, although still lower than the level before the 2008 financial crisis. The move, officials argue, is aimed at helping the government improve its fiscal situation but it is expected to push up the cost of almost all manufactured goods - from food products to consumer durables and automobiles.
While a rollback of the stimulus was expected in the last budget, finance minister Pranab Mukherjee surprised the industry and the market by sticking to 10% standard rate of central excise. His calculation was that his finances were healthy and some more support to the manufacturing sector would only help. Since then, the economy has turned more fragile, with industrial production rising in low single digits. The Centre's fiscal health is even more problematic. In addition, an increase in excise duty will add to the inflationary pressure, especially in the manufactured goods segment where prices rose by over 9% on last count.
Although a final decision is yet to be taken, sources in the government indicated that the move has been necessitated by a tight fiscal situation, which is expected to persist during the next financial year with the government in no position to prune the high subsidy bill. A decision on changing the key direct and indirect tax rates is taken at the level of the finance minister and the PM. Officials in the ministry have argued that should the economic condition deteriorate, the government can always reduce the duty.
In fact, through the current fiscal, officials in the Central Board of Excise and Customs were ruing the fact that Mukherjee chose not to increase rates in the last Budget and withdraw the stimulus at a time when the economy was healthier. Another argument being put forward is that the overall economic sentiment, although subdued, is better than what it was a few months ago. With inflation now coming down, interest rates are expected to start falling during the course of 2012-13. That is expected to boost sentiments, officials said.