War on Inflation Must Continue

The spectre of high inflation and higher interest rates is back with a vengeance. A heady mix of the two makes a lethal combination and turns out to be the biggest sore point for a growth-oriented finance minister like Nirmala Sitharaman.

One is reminded of the high inflation and interest rates that singed the Indian economy during 2009 – 14 when the Governance was under the control of Harvard trained veterans like Dr Manmohan Singh as Prime Minister and the arrogant Palaniappan Chidambaram.

India’s modern economic history bears testimony to its complete incompetence, thereby derailing the famed growth story that stood the test of time until then.

In 2009, G-20 Presidents and Prime Ministers had gathered in a summit mode at Pittsburgh in the US to discuss the economic turmoil heaped on the world due to the collapse of American financial markets that had a contagion effect across geographies.

The then US President Barrack Obama famously said that world leaders at the head table leaned heavily on the wisdom of Dr Singh to steer the economy out of the woods.

Well, Dr Singh’s prescription may have worked for others. But, India faced economic turmoil owing to ‘inaction’ and ‘policy paralysis’ combined with rampant corruption that was the hallmark of the UPA Government in its second tenure.

The real incomes of most people were lost. Pink slips were the order of the day, notwithstanding economic rescue packages announced by the inept UPA Government. Kitchen budgets had to be cut. Purchases had to be postponed by force. And this phenomenon continued till 2014 when the Narendra Modi led juggernaut swept the Lok Sabha polls, and the first BJP-led majority Government came to power on its own.

Today again, the foreign induced inflation has raised its ugly head again. Inflation in the wholesale market has hit a record of 15.08 per cent in April 2022. Vegetables (23.24 per cent), Potatoes (19.84 per cent), and wheat (10.7 per cent) have contributed big time to inflation in the last 13-months that, has been double digits.

When the WPI passes through to consumers in the next few months, the impact is devastating whether a policymaker concedes. Hardening of fuel and power inflation at 38.7 per cent in April 2022 would make things worse for consumers that have been worst hit hard due to two years of Covid 19, Russia – Ukraine conflict and consequent spurt in commodity prices.

Unlike the UPA of yesteryears or Joe Biden’s present democratic administration in the US, the Indian government headed by Prime Minister Narendra Modi has been proactive in managing consumers’ and middle-class salaried peoples’ woes. Otherwise, tackling inflation would not have been prioritised overgrowth with an interest rate hike of 40 basis points and an increase in cash reserve ratio, Standard Deposit Facility and Marginal Standing Facility.

Another round of rate hikes has been anticipated by money policy experts when the multi-member policy committee of RBI meets next month. Another 50 – 75 basis points increase has been factored in by the markets.

Pulling inflation below the acceptable 6 per cent at the retail level is an imperative from which neither the RBI nor the Modi Government can escape. Nirmala Sitharaman, on her part, began rolling out measures to counter inflation beginning November 2021, when excise duty on diesel and petrol were slashed. This led to revenue losses of over Rs 49,500 crore. She was willing to absorb these revenue losses too.

Food, fuel and fertiliser subsidies form a big chunk of Nirmala Sitharaman’s budget that, projected a total spending of Rs 39.45 lakh crore (the US $ 527 billion) during this fiscal. She will have to consider tinkering with subsidies to negate the impact of high input costs for the economy due to elevated price levels internationally.

While the cost-push has had its run leading to high inflation globally, easing demand may bring in some respite for finance minister Sitharaman. But then, this war on inflation and prices has to continue in the Indian context. Finance Minister Sitharaman and RBI governor Shakti Kanta Das may have to reconcile by sacrificing more of the projected 7.5 per cent growth.

While none should risk stagflation or recession, a fresh round of cuts in taxes on petroleum products may have to be attempted to cool down inflationary pressures. Both states and the centre may have to act on this front. Preceding revenue may turn out to be a clincher.

Fortunately, buoyant money, equity markets, and continued demand for goods and services have kept industrial manufacturers and service providers on their toes to deliver. As the rate hikes seep in, slowing demand may make things trickier in a few months from now.

There’s very little elbow room for the government to rejig the goods and services tax rates. In any case, a slash in GST rates can be done only in consultation with state finance ministers that are already under tremendous pressure to meet ends.