Editorial

Dealing with the demon

| Updated on June 16, 2021

Tariff and tax cuts the best way to immediately deal with across-the-board price rise

Rising inflation, both retail and wholesale, can no longer be ignored. Retail inflation ruled on average at above 6 per cent in 2020-21, well above the MPC’s stated acceptable level, with subdued rates in the last four months of the previous fiscal coinciding with the opening up of the economy. Thereafter, the second wave of the pandemic struck, disrupting supplies. The key factors driving up inflation now are fuel and commodity prices that are rising globally, distorted domestic tax policies and at the margin, a higher pricing power in a clutch of items and services. The consumer price inflation of 6.3 per cent for May comes on a high base, quite unlike the wholesale price index rise of 12.9 per cent for the same month; the WPI was negative last May, as global commodity prices nosedived. In analysing inflation, it is important to separate four strands: the supply disruption effect arising from the pandemic, the input cost effect, the domestic tax effect and the pricing power effect where demand remains inelastic.

The sharply rising WPI since January 2021, when it was up just 2 per cent, mirrors a global commodity price spike as described by the World Bank’s Commodity Markets Outlook brought out in April. The report observes: “four-fifths of commodities (are) now above their pre-pandemic levels, in some instances considerably so.” With global production hit last year, low inventories have added to the price pressure. The global infra-led revival, backed by hefty stimulus packages, has created an inflationary ripple worldwide, with US inflation too crossing 5 per cent in May. A rate cycle reversal in the US could transmit a further inflation shock through the currency route. Hence, the RBI must endeavour to keep the rupee stable to counter imported inflation, which could continue, even if at lower levels, in 2022.

Domestic forces too are at work on the inflation front. Chief among these are central and State excise duties on petrol. The central excise duty on petrol and diesel amounts to ₹32-33 a litre. To this, the States add another ₹18-20. The Centre and States should work out a reduction formula, forsaking short-term revenue gains. The 15 per cent import duty on edible oils should be revisited for now to blunt the global price impact (India imports more than half its requirements). Retail edible oil prices were up 30.8 per cent in May. Policy steps to keep steel and cement prices in check must be considered. An 8.4 per cent increase in health services is also a result of pricing power, given rising health-related anxieties. Such increases are sticky. Hence, CPI core inflation at 6.6 per cent in May should not be viewed as a transient phenomenon. While pursuing growth is important, monetary policy cannot be seen as being indifferent to inflation as it can negate all efforts to revive the economy. This is the challenge that the MPC is now up against.

Published on June 16, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor