Inflation threat: Govt must step in

Inflation threat: Govt must step in

It is time to suspend central excise taxes and cess on fuel for at least one year

Representative Image. Credit: iStock Photo

The bi-monthly meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in early October decided to maintain the status quo: no change in the policy interest, known as repo rate. It is the lighthouse signal: a rate around which all lending rates revolve for loans from financial institutions to borrowers, including households. Accordingly, the repo rate continues to be at 4%. The reverse repo rate remains at 3.35%. This is the rate at which the RBI mops up excess liquidity from the banks, by selling bonds, as an open market operation.

The October MPC decision is for maintaining an accommodative stance, “as long as necessary to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy.” The objective of monetary policy is to achieve the medium-term target for consumer price index (CPI)-based inflation of 4% within a band of +/- 2% while supporting growth. Known as ‘headline inflation’, it is obtained as the change in the monthly cost to purchase a fixed basket of goods, for measuring monthly inflation. It is the eighth consecutive MPC decision to maintain a ‘pro-growth’ stance in the midst of a heating up of the economy. There are hopeful signs of Indian economic recovery, supported by a rapid increase in vaccination coverage.

Signs of inflation

Inflation in advanced and emerging economies, including India, is rising due to stimulus by governments through aggressive fiscal spending for economic revival. Prices of metals and energy as well as agricultural commodities are up. Lower output of raw materials in 2020 due to the pandemic also was another reason behind inflation. Inflation in the US was 4.2% in April this year, 3.6% in September.  
Based on the release of CPI and Wholesale Price Index (WPI) data in mid-October, retail inflation and WPI-based inflation for September were 4.35% and 10.66%, as against 5.30% and 11.39% in August, respectively. Both CPI and WPI inflation eased in September, which formed the basis for the RBI’s October decision. In fact, picking up the signs of global economic revival, crude oil prices are also rising. It is an opportunity for the oil-producing and exporting countries to increase crude prices to make up for the loss of revenue since mid-2020.
The rising trend in crude price began on September 24, after a gap of stagnant prices over four months. After April 2021, the benchmark Brent crude price of $64.41/barrel began to exceed the dangerous mark of $70 in May and it touched $75.16 in June. On September 24, it reached $77.47, the highest since June 21. There has been no stopping it since. It reached $82.56 on October 5, the day the MPC began its deliberations.

The impact of the rising crude price on CPI inflation since September 24 will be known only when the data on CPI and WPI is available in mid-November. The next meeting of the MPC is scheduled for the first week of December.

In the meanwhile, the rising trend is still on. Brent crude price hit $84.57 on October 19 and $85.07 three days later. On the same day, petrol prices in rupees per litre hit the ceiling: in New Delhi, Rs 106.89; Mumbai Rs 112.44, and Bengaluru Rs 110.61. Diesel prices in rupees per litre were in New Delhi Rs 95.62, Mumbai Rs 103.63, and Bengaluru Rs 101.49.  

India imports 83% of its total requirements of petroleum crude. Transportation costs of raw materials from sources to factories and of manufactured products to retail markets and of food grains, vegetables and fruits from farms to markets will all soar. Retail inflation could exceed the target.

Last week, the US Treasury Secretary and IMF staff economists’ latest assessments were that inflation would stay over the next few months and well into the New Year. It is no longer transitory.

Anchoring inflationary expectations is now in the hands of the government. Shaktikanta Das, the RBI Governor, is on record as saying, “Efforts to contain cost-push pressures through a calibrated reversal of the indirect taxes on fuel could contribute to a more sustained lowering of inflation.” Cutting indirect taxes is also part of fiscal policy, providing stimulus.

That is the challenge before Union Finance Minister Nirmala Sitharaman. State governments are unwilling to forego their revenue. She knows it. She said in an interview with Bloomberg in New York: “The way fuel prices are leading to a big crest…This uncertainty is a big element for me.”

It is time to suspend central excise taxes and cess on fuel for at least one year and review it after that period.  

(The writer is Honorary Adjunct Professor, Amrita School of Business, Bengaluru)

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