RBI's Patra Says Cutting Fuel Tax Can Cushion Inflation, Support Growth

Amid a massive spike in crude oil prices following Russia's invasion of Ukraine, Reserve Bank Deputy Governor Michael Patra on Friday said the government can slash duties on crude and thus prevent the pass-through effect on inflation and sustain the economic recovery as "our growth story remains as weak as it was at the time of the taper tantrum" in 2013.

Addressing an event by industry lobby IMC, Patra noted that private consumption is just a shade above the pre-pandemic level, with discretionary consumption spending lacking traction and private investment is yet to participate in the recovery.

"In essence, our growth story remains as weak as it was at the time of the taper tantrum in the summer of 2013. And the recent reverberations of the war have, in fact, tilted the balance of risks downwards," he said.

Crude oil, which was trending at USD 93 a barrel on February 23, soared to USD 134 last week, before moderating to USD 110 levels.

A report by Credit Suisse India said crude at USD 150 a barrel can shave 300 bps off the GDP.

On the impact of fuel prices on inflation, Patra said "the tax component of pump prices still being substantial in the wake of increases during the pandemic, there is headroom available for reducing these taxes and cushioning the transmission of international crude prices to retail inflation."

He also said the government thrust on capex in FY23 can be the gamechanger this time around by enhancing productive capacity, crowding in private investment and strengthening aggregate demand.

Another silver lining is export performance, but unlike domestic investment, exports are in some sense hostage to global developments.

Though in 2022 we face similar risks as in 2013 from surging international crude prices and the volume of gold imports, yet the external sector is much more viable than it was in 2013, he noted.

Taper 2013 was preceded by current account deficit (CAD) averaging 3.7 per cent during 2009-13, with a peak of 6.8 per cent in the third quarter of 2012-13.

The improvement in the current account in the recent period draws strength from robust export performance, both of goods and services, with targets set at USD 450 billion and USD 300 billion, respectively, for 2022-23.

In 2012-13, India's exports of goods and services were flat and remained subdued in the following year, he noted.

In fact, FDI alone fully finances CAD today. By comparison, FDI constituted less than a third of net capital flows during 2009-13, he said.

Also, the country's ratio of external debt to GDP is one of the lowest among emerging markets.

Perhaps the greatest strength is the buffer provided by the high forex reserves of USD 630 blilion, which is the fifth highest in the world.