India’s inflation fight will hurt growth

India's export duty hikes and tax cuts will likely hurt economic growth and raise the chances of the fiscal deficit widening, but do little to bring down retail prices within the central bank's tolerance level, economists and industry officials said.

Over the past month, India's fiscal and monetary policy have U-turned from being growth-focused to honing in on inflation - with the central bank raising the key interest rate by 40 basis points, and the government cutting taxes on fuel and disincentivising exports.

"The measures announced mark a tacit admission by the government that both fiscal and monetary policies are set to be deployed to bring inflation down," said Sonal Varma, an analyst at Nomura.

Still, despite government intervention, India may end up with retail inflation at least 100 basis points above its 6% tolerance level, as key food prices are likely to be on the rise, economists at banks like HSBC and Nomura said.

The moves could hurt growth and the fiscal deficit could widen by 40-50 basis points, they said, despite the central bank governor saying India was likely to achieve its fiscal deficit target at 6.4 per cent of GDP.

Higher borrowing costs due to rate hikes and measures such as export taxes which could slow capital spending will hurt growth prospects, said Suvodeep Rakshit of Kotak Economic Research.

"The recent setback to growth and uncertainty on consumer demand is likely to push the revival in the private investment cycle further away," Rakshit said.

He kept his inflation projection unchanged at 7.2 per cent for 2022/23.