- The rising inflationary trend across the globe did not leave Indian shores from singeing either as the domestic pressure courtesy of rising commodity prices is being felt by everyone across the spectrum. Especially the fuel price rise heading northwards spelled trouble for consumers who were already reeling under the pandemic induced economic duress as well as the heat generated by the ongoing Russia and Ukraine conflict. Something had to give in, and the Union Finance Ministry has rightly stepped in to lower excise duties on petrol and diesel as well as offer a subsidy for LPG cylinders.
PC: Daniel Lacalle
- As you are aware, not just inflation, growth is also being threatened by accelerating prices leading to a cascading effect further distressing the common citizens. Since many opposition-ruled states were questioning the fiscal prudence of the Union Government over rising inflationary trends, the situation aftermath of the Centre’s excise duty cut should push these states to chip in with further reduction in taxes of their own. In a welcome move, opposition governed Kerala has already announced a reduction in state fuel levies. Therefore, other states should not delay whilst complementing the Union Government since politics on the matter should not come in here.
- People will not appreciate politics over something as basic as controlling the rising prices of essential commodities. Mind you, the combined impact of tax cuts will provide much-needed relief to stressed household budgets and small business balance sheets. Remember, any package of fiscal measures marks an adjustment in the overall economic policy. Many experts say the current spell of inflation is reminiscent of the experience a decade ago whose sharp increases in food and fuel prices catalyzed a more generalized rise in the price level. The difference back then and now is that elevated inflation took place on the heels of high economic growth a decade ago.
PC: PIT
- Now, it’s happening in the backdrop of five years of economic weakness, a pandemic shock followed by slowing growth. Thus, this requires a different approach to finding the right mix between fiscal and monetary policies. India’s fiscal policy, both at the level of GOI and states, has been relatively tight given the current context. Note that the growth of nominal GDP is way more than the interest on government borrowings. As such, there’s no threat to the sustainability of government debt. As reported, GOI’s net tax revenue between April 2021 and February 2022 was Rs. 14.88 lakh crore, almost Rs. 3.75 lakh crore higher than what has collected two years ago in a pre-pandemic year.
- Yes, the situation is similar in most states and many of them have budgeted for a ratio of fiscal deficit to state domestic product in 2022-23 that’s lower than the cap fixed by GOI. In short, there is room for using fiscal policy as the primary tool to find the balance between keeping a check on inflation while simultaneously protecting private consumption and economic growth. Understandably, RBI has no choice but to tighten monetary policy now. As regards the GOI, it needs to be nimble by keeping a watch on domestic and global factors as this financial year progresses. And states can contribute too without resorting to petty politicking.
