Govt attempts to fix deficit, may hike excise duty to 12%

Get ready to pay more for your products as the government may hike the excise duty to 12 percent in the upcoming Union Budget from the existing 10 percent. This move, though still lower than the level before the 2008 financial crisis, is aimed at helping the government improve its fiscal situation but could push up the cost of manufactured goods right from food articles to consumer durables and automobiles, a Times of India article said.

A widening fiscal deficit is the primary reason why the government may increase the excise duty. Many economist have pegged that the government will not be able to reach its fiscal deficit target of 4.6 percent of gross domestic product (GDP) for the year ending March 2012. Most of them are expecting it go as high as 5.6 percent, almost a percentage point higher.

A higher fiscal deficit has significant implications for inflation and interest rates (a higher fiscal deficit forces the government to borrow funds from the market, which reduces the amount of funds available for the private sector and raises the cost of capital as well).

While this may help the government reduce the gap, there are concerns that an increase in the excise duty will add to the inflationary pressure, especially in manufactured goods where prices rose by over nine percent, said the TOI article.

However, an official in the ministry argued that should the economic condition deteriorate, the government can always reduce the duty.

The govt was expected to hike the duty in the last Union budget but ended up sticking to the ten percent standard rate as the economy was healthier.