Union Budget 2010-11: How it's likely to cause price rise, petro and gold prices would impact inflation

The Union finance minister, Pranab Mukherjee’s budgetary proposals for the year 2010-11 may help the economy to achieve the magic growth figure which is targeted at 8.5%, but little it can do to vanish the price inflation worries. In fact certain proposals in the Budget would lead to further rise in prices of essential commodities.

The proposal to restore the basic customs duty of 5% on crude petroleum, 7.5% on diesel and petrol and 10% on other refined products was justified by finance minister by saying that the increse in custom duty is the roll back to the level which was reduced in June 2008 as the prices of crude was pretty high about $120 / barrel at that time but tnow the prices are softened. And moreover it was the time to move on the path of fiscal consolidation.

The global prices of crude oil had softened in the wake of the global financial crisis, but now it has shown a rising trend. Currently the global prices are hovering around US$ 80 per bbl. As India depends upon crude oil imports to the extent of 70%, these measures of the government would definitely translate into further price inflationary pressure on the economy. Following the announcement of the budgetary proposals, the Indian oil companies have decided to upscale the prices. Diesel prices in Delhi is likely to increase by Rs 2.55 and that of petrol by Rs 2.71 a litre. Thus not only public transport would become costlier, but also the transportation of essentialcommodities. Already the country is reeling under the impact of soaring prices.

Another folly in the budgetary proposal is to increase the customs duty on gold and platinum from Rs 200 per 10 grams to Rs 300 per 10 grams and on silver from Rs 1,000 per kg to Rs 1,500 per kg. This caused the rise gold prices and the spillover effect was on the prices of other commodities as well. Gold has now become an important area for investment and in India, particularly the attachment to this precious metal is due to the cultural ethos.

Instead of raising the custom duties the FM should rollover some of the incentives which was given to the manufacturing sector at  the time of financial crisis and as in current scenario they have registered a growth of around 8.9%, some of these incentives could have been withdrawn in a calibrated manner.

But I must admit that this a strong step taken by the finance minister without worrying about the reaction of opposition parties. Definitely in long term it will be beneficial for shooting up the growth rate of GDP of country. But short term effect will be double digit inflation in few months.

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