Dealing with the demon – The Hindu BusinessLine

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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.

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.

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