A cause of panic?

Last week, the Central government cut down excise duty on auto fuels, which helped lower petrol and diesel prices by Rs 8.69 and Rs 7.05 per litre respectively. Subsequently, sugar export is capped and duty-free import of 20 lakh tones of both crude soyabean oil and crude sunflower oil is permitted, which will reduce their price by Rs 3-5. These are timely and effective steps meant to counter the current inflationary trends in the economy which is yet to fully recover from the slowdown caused by the pandemic. It is reported that in March 2022, the Wholesale Price Index (WPI) indicated wholesale inflation rising to 14.55 per cent and the Consumer Price Index (CPI) put retail inflation rate at 6.95 per cent. It is of course a matter of concern, but not grave enough to cause panic.

Inflation is a natural economic phenomenon and, if monitored properly, can be advantageous for growth. It boosts demand in the short run which, in turn, helps increase production and employment. Most importantly, inflation is a firewall against deflation (fall in prices), which is dangerous for an economy, for it adversely impacts production, employment and wages — also leading to a fall in aggregate demand. The Great Depression of 1929 is a classic example. However, the problem arises when inflation increases from single digit to double digit in a year (known as 'walking inflation'). Not to mention the 'galloping inflation' occurred during the 1980s in the United States — the worst of all inflations, famously phrased by President Reagan "as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman". Sri Lanka is experiencing a somewhat similar crisis, not just due to increase in crude oil prices but also because of utter mismanagement of the economy resulting in double debt (trade deficit and budget deficit).

Inflation, especially in the food sector, is a heads-up for the future. It implies that in absence of prompt and farsighted steps, the country may face a structural inflation engulfing almost all sectors — leading to a rise in prices of household consumer goods, fuel, power, transport, healthcare, essential services etc. beyond permissible limits. However, for now, there is sufficient space for corrective interventions. Stock market fluctuations are not really reflective of a crisis, as they are influenced more often by sentiments rather than fundamentals. Inflationary trend is uneven across sectors, as price rise differs from sector to sector, depending on various factors. For example, in the sectors which depend more on fuel, production costs rise in correspondence with the rise in fuel prices (cost-push inflation) whereas other sectors may not be affected in the immediate run. However, to play safe, local measures need to be initiated, keeping in view the global inflationary trends.

The world economy has been reeling under inflationary pressures over the last two years due to factors including rising energy and fuel prices, shortage of production, exorbitant shipping costs, rising wages due to staff shortage, trade barriers etc. Economic stagnation resulting from a prolonged pandemic, coupled with high inflation, has led to stagflation — gripping Europe and other Western nations. The Russia-Ukraine crisis was the final straw, culminating in disruption of exports of food grains and fuel from both countries to the rest of the world. In the UK, a 54 per cent rise in energy price led to three quarters of the jump in inflation.

Developing economies bear the brunt of global inflation the most for obvious reasons. The conventional wisdom guides central banks to raise interest rates as a method to discourage borrowings and encourage savings. The RBI raised the repo rate from four per cent to 4.4 per cent in April, making loans costly but deposits rewarding. It protects the purchasing power of people in the short run. However, in developing countries where financial inclusion is a conundrum, such macroeconomic measures have little or no impact. According to the World Bank's Global Financial Inclusion Database, 2017, though 80 per cent of Indian adults have bank accounts, India's share of inoperative accounts at 48 per cent is the largest in the world while the average figure for developing economies is 25 per cent. Perhaps more practical measures like cash handouts, distribution of subsidised food grains, discount on public transport, communication, special schemes for migrant labourers and vulnerable classes etc. can be more effective. For instance, France spent 13 billion Euros to: dole out one-time grants of 84 Euros to each beneficiary from economically disadvantaged classes, reduce taxes on power and restrict the rise in energy bills to four per cent. Germany announced subsidies for low-income groups and also slashed down taxes on petrol and diesel. Other measures include a one-time grant of 300 Euros per person, public transport discounts, child welfare grants etc. Italy declared fuel subsidies worth 14 billion Euros and raised taxes on power companies that benefited by rising energy prices.

RBI's expectation that the average inflation is likely to recede from 5.3 per cent of last year to 4.5 per cent this year is not entirely unfounded. Though the IMF projects a lower growth rate from 9 per cent to 8.2 per cent for India, the time-tested resilience of the Indian economy that successfully stood against the headwinds of global meltdown in 2008, cannot be underrated. There is plenty of good news around. Firstly, while in the services sector, exports recorded a high of USD 250 billion, in the merchandise sector, these shot up to 43 per cent with USD 418 billion as against USD 292 billion last year. Exports in May 2022 rose by 21.1 per cent because of growth in various sectors. In petroleum products, the increase has been 81.1 per cent while in engineering and electronic goods, it's about 17 per cent and 44 per cent respectively. The Union Government has stated at the World Economic Forum in Davos this month that a record level of USD 250 billion of exports came without the hospitality sector and other key sectors; and the focus today is on exports in the services sector. Secondly, the capital expenditure to the tune of 7.5 lakh crores earmarked in Union Budget — 35 per cent over that of the last year — has the potential for increasing economic activity with employment generation. Thirdly, high GST collection (Rs 1.42 trillion) was a record in March and was projected to do even better. Fourthly, an inflow of Rs 7,000 crore worth of investment was seen in the market in March, as FIIs sold more than 40,000 crores in Indian equity markets — a positive sign for the return of FIIs. Finally, the best part is that the Pandemic is receding, making room for revival of the economy.

India has a demographic dividend with an enormous chunk of young population and a huge talent pool. Moreover, unlike the export-oriented economies, India has huge domestic demand — enough to consume the entire production internally. Timely measures are all that is required. Immediate focus needs to be on the agriculture sector as the monsoons are fast approaching. Supplies of seeds, fertilisers, pesticides, machinery — along with smooth rural credit — need to be ensured without fail, because a good harvest is a blessing against inflation. The ongoing employment generation schemes like MNREGA and the PDS programmes need to be monitored carefully to protect the BPL population and other vulnerable sections. While cash handouts, tax reductions, and various other subsidised public services will increase the purchasing power of people, good governance and best practices in the delivery mechanisms are equally important to consolidate the gains.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal