The India government should adopt a strategy of reducing import and domestic tariffs while lowering taxes to bring down the inflation rate, according to economist DK Joshi.
Despite consumption going down during the pandemic, the inflation rate in India has been increasing with the rate at 4.25 percent in April 2021 rising to 6.3 percent in May.
A combination of oil prices rising internationally, prices of commodities firming up sharply and domestic imports on petroleum products has contributed to inflation.
Joshi, who is the Chief Economist at rating agency CRISIL, believes that the ball is in the government's court with regards to bringing inflation down.
"The only thing in our control is to reverse some of the things that we had initiated earlier. You can bring down import tariffs. That can bring relief on the imported inflation side. You can bring down domestic tariffs on petroleum products which is a tough ask right now given that fiscally there is so much of stress," Joshi told BOOM.
Edited excerpts follow
We do know that inflation is rising, we do know that it affects us quite badly and the way we lead our lives on a daily basis. Why is it happening and why is it happening now?
DK Joshi: I think there are two sets of reasons. One is the international prices — crude oil (price) is already above 75$, and then I think, we have taxes — domestic taxes on crude are quite high. And the combination of both creates high fuel inflation.
The second factor is that the commodity prices have firmed up very very fast, and sharply. Plus, a global recovery and strong recovery in quality intensive manufacturing sectors — services have not picked up, but manufacturing has picked up. So that has given a big boost to metal and steel prices, aluminium. So, all these are seeing an upturn.
And then on top of that, on the food side, the edible oil where we import more than 60% of the requirement has seen a very sharp increase. So, these are global factors that are outside our control.
On the domestic side, we have taxes on oil as I just mentioned. These are contributing to prices of petroleum products remaining high. We also have import tariffs on some of the commodities that were introduced after the budget last year. I think they are also keeping imported inflation high. And finally, I think there is some supply disruption, which also feeds into it.
So, if you compare what is happening in India with the rest of the world, I think there the demand is rising. The advanced countries are growing very fast. Demand is likely to contribute more to inflation. For India, it is more of cost push inflation from the supply side. And if you look at the nature of inflation that also can tell you who is getting hit.
For instance, the fuel inflation average for April and May is 9.8 percent. And if you look at food and if you talk of dal roti, I think roti is getting cheaper, cereal inflation- rice, wheat- is negative. But if you look at the other side which is the dal or the proteins, I think whether it is the vegetable or animal proteins both are seeing very high inflation in double digits due to oils and fats, which are obviously imported.
Finally, the services sector, which is transport and communication, which has seen 11.6 percent inflation and health where the spending is increasing because the pandemic is essentially a healthcare problem. So, health inflation has risen to 8.1 percent on the average in the last two months. So therefore, there is a broad-based push to inflation. Except for cereals, I think, most of the things are looking up.
Fuel affects most people; health affects a lot of people. Could you compute how an average Indian is getting affected?
DKJ: I think, if you look at the consumption side, it hits the poor more than the rich, that is for sure. What we know is that, right now, the purchasing power of the poor people has gone down because there has been a hit to income and not so much hit to the upper income category.
From that perspective, I think, it is having an inequitable impact on the poorer. And I think generally when the incomes are under stress it amplifies the ability to consume so to say. It is more pronounced for poorer people. What we also find is, this time around — the last time the rural economy did well — the food inflation remaining high is not good news for everyone but is definitely good news for the farmers because they realise more for their produce. And what we are seeing is completely the reverse of last year.
I think the food inflation has averaged around 3.5 percent for the first five months of this calendar year and the non-food inflation is at 6 percent. But if you look at last year it was just the opposite. Food inflation was at 9.6 percent and non-food was below 5 percent. What this means is the farmers sell food and they buy non-food.
The non-food has become expensive and the food has gone down. Clearly these price dynamics are not favourable for the rural folks, particularly for farmers. So that is another way to look at it.
Overall, if I divide the economy into rural and urban, the rural economy benefited from higher NREGA spending last year and also good monsoons. This year, the monsoons are supportive but the NREGA spending is lower and on top of that the price dynamics are not favourable from a farmer's perspective. All that means that the rural economy is getting squeezed compared to what we saw last year.
If we were to look at the constituents of inflation, what is driving prices up and therefore making the cost of living more for me, what could bring it down? What is there in our control, if anything, that could reverse it?
DKJ: The only thing in our control is to reverse some of the things that we had initiated earlier. You can bring down import tariffs. That can bring relief on the imported inflation side. You can bring down domestic tariffs on petroleum products which is a tough ask right now given that fiscally there is so much of stress.
I think these will have a spill over effect on the economy which will be very positive. Because the fuel inflation rising will cascade into many other parts of the economy as well through transportation costs etc. So, I think reducing fuel inflation while lowering taxes would be a good idea at this juncture.
Otherwise, if inflation continues to remain high at 6 percent on a continuous basis, then RBI will have to use its fire power which will not be very effective in the present scenario. So, the ball is in the Government's court so to say to control this cost push inflation and give relief.
You earlier asked about the consumer. His savings behaviour also gets altered. What we typically find is that the fixed income instruments, that is your fixed deposits in the bank, are giving negative returns. So many of the investors who have money to invest or save, I think, move towards more riskier asset classes like equities, etc, which if this continues, I think will have ramifications for financial stability also going ahead.
Almost 50% of household financial savings are in fixed deposits. Am I right?
DKJ: That is right.
This combination of economic forces, lower income because of various reasons including COVID, COVID itself and the damage that it is wrecking on the economy. Have we seen anything like this before, or even close to anything like this before? What would you compare with, if you were to draw a path out of this?
DKJ: We have seen various instances where inflation rose and growth was coming down and people started raising noise about stagflation. But in terms of magnitude, at least in my working knowledge, whenever I have started looking at the economy, I have not seen a period when the economy fell so much and inflation was still above. Maybe in early 70s etc, but I do not remember the data. But in my working life I have not seen so much stress.
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