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Inflation is continuing to soar in India, not just because of more money chasing fewer goods, but because of government policies that allow high return on investment (ROI) companies to charge an extra price. Here are some simple solutions that can reduce inflation:
Crude oil has zero import duty but purified terephthalic acid (PTA), mono ethylene glycol (MEG) and other plastics attract Customs duty. Exports of these products enjoy a very high Duty Entitlement Pass Book (DEPB) scheme. If we remove the Customs duty on imports of PTA, MEG and poly-vinyl chloride (PVC) and consequently remove the DEPB given on exports of these products, the price of plastics and polyester will come down by at least 15 per cent. There will be hardly any customs duty loss, but Rs 4,000 crore of DEPB will be saved.
We have export tax on iron ore, and also allow iron and steel to get DEPB on exports. We also have import duty on iron and steel. This gives huge profits to our Iron and Steel industry. We need to reduce export benefits to the extent the iron ore is taxed when exported. Iron and steel prices will drop by 3 to 5 per cent.
Cement prices , globally, are much lower, because the Bureau of Indian Standards (BIS) certification norms act as a virtual import barrier and prevent foreign cement suppliers from entering India. Hence, a handful of cement manufacturers can form a cartel and charge artificially high prices. Cement prices can drop by at least 20 per cent, if BIS certification norms are removed.
Instead of subsidizing diesel, if we can transfer the subsidy to rail cargo, our logistics costs will go down substantially.
If we can reduce port charges for internal cargo movement and encourage competition, the freight rates for coastal cargo will come down and logistics costs can come down steeply.
Doing away with DEPB, which helps domestic manufacturers to export surplus capacity at much higher realisation than otherwise, is helping them to charge higher prices to domestic customers too. If a certain per cent, is added to take care of compensating for state taxes and infrastructure disabilities across all products to Duty Draw Back (DDB), it will be a more accurate way of giving back taxes and duties.
Free Trade Agreement (FTA) with the European Union (EU) will help reduce prices of goods made by inefficient sectors and promote a huge increase in employment generation by the labour-intensive sector, which will be able to substantially increase their exports.
INCLUSIVE GROWTH
By removing the ‘freebies' that we continue to give to high ROI companies , we are adding to our inflation and current account deficits. In order to reduce the impact of the inflation caused by letting these companies make extra profit, we are penalising the common man and the labour-intensive Micro, Small and Medium Enterprises (MSME) sector.
There are better and more imaginative ways to keep inflation at a lower level, and ensure growth, especially for the employment-generating sectors without impacting the EMIs of the common man. In short, we can achieve lower inflation, higher growth, and higher employment generation, if our policies are tilted towards ‘inclusive growth' rather than growth of large, high ROI sectors.
(The author is Managing Director, Loyal Textiles Ltd.)
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