'Duty hike may push up inflation by 0.25-0.5percentage points'

The government's decision to raise excise and service tax will have marginal impact on prices and may push up inflation by 0.25 to 0.50 percentage points, Chief Economic Adviser Kaushik Basu has said.

"There will be some increase in prices due to increase in excise and service tax...25 to 50 basis points a one time rise in prices," Basu, who also heads a Prime Minister appointed panel on inflation, told PTI.

Faced with rising fiscal deficit, Finance Minister Pranab Mukherjee increased both excise duty and service tax rate to 12 per cent from 10 per cent to generate an additional revenue of Rs 45,940 crore.

Justifying Mukherjee's decision to hike tax rate, Basu, said that in the long run, improvement in fiscal situation will help in moderating inflation.

By raising taxes, Mukherjee planned to bring down the fiscal deficit to 5.1 per cent of the Gross Domestic Product (GDP) from 5.9 per cent estimated in 2011-12.

Inflation, as measured by the Wholesale Price Index (WPI), was 6.95 per cent in February. It remained close to double-digit throughout 2011 before moderating to 8.3 per cent in December.

"We expect inflation to be 6.5 per cent over the next fiscal," he said, adding that the average inflation during the current fiscal would be 8 per cent.

Unlike 2011, Basu said, "I do not expect food inflationary pressure next year. I expect food inflation around the average of 6-6.5 per cent."