Will indirect tax cut boost consumption?

Govt. reduced Excise duty from--- 10%-8%
Service tax from 12%-10%

So will this reduction in indirect taxes boost consumption? Perhaps partly.

• Textile sector is virtually exempt from excise, expecting the synthetics segment which attracts a low rate of 4% excise.
• Duty reduction on inputs from 10%-8% is immaterial because a ‘passthrough’ in the form of Cenvat credit to the manufacturers.
  But the SSI sector directly benefits, assuming that the duty reduction is passed on by the input manufacturers.

So now what left are the consumer goods and consumers durables. Arguably, in the normal course, the 2% point reduction for them is not likely to result in any appreciable price reduction leading to aggressive consumption.
In the present crisis scenario, 2 factors are significant.

1. The decisions of Dec 7 and Feb 24 mean a cumulative reduction in the duty incidence of the peak rate of Cenvat by a hefty 43%; from 14% to 8%.
2. In the demand recession situation, the industry is likely to pass on the benefit to the consumers.

Talking about services, their cost would come down. But whether it would boost demand is unlikely. Perhaps the govt. perceives the service tax rate reduction.
Based on the response from the first and second stimulus packages, one could be pessimistic about its intended impact. This is despite the sharp fall in the non-food inflation rate, which is right now well below the threshold level. (These measures might lead to near-deflationary situation in the non-food articles).even if it has some positive effect in the short-term, this is expected to have an adverse impact in the long run.

The fiscal deficit now is estimated to be around 7.8% (including off-budget items). In my view, this leaves very limited room for the effectiveness of any monetary policy measures such as rate cuts. This could also disturb the relationship between Public and Private Investments. Fiscal expansion above the threshold might reverse the private investment trajectory. Further, the downgrading of the economic outlook by the rating agencies, if one still takes it serious, might restrict the foreign capital inflow and could mess up the external balances.
· Due to this huge fiscal deficit, investments on infrastructure projects will standstill or get reduced.