Inflation benefits sellers and the government while people are getting poorer

    fuel prices

    Continuing and rising oil and coal prices contributed to the broad economic impact of inflationary pressures. With petroleum being an essential intermediate product, sooner or later this outcome was inevitable. There is no doubt that the escalation of international crude oil prices is the primary factor responsible for the fuel inflation, but the Indian government’s escalation of taxes in the petroleum sector is equally responsible.

    Taxes on petrol and diesel have been increased 12 times since 2014. As a result, the tax on petrol has increased nearly three times from 9.4 to INR 26.77 and the tax on diesel nearly nine times from INR 3.56 to 31.47. There is no parallel in Indian financial history for such a staggering, cold-blooded rise in the tax rate for any commodity.

    The result was that revenue from the petroleum sector increased from ₹1.72 lakh crore in 2014-15 to ₹4.55 lakh crore in 2020-21 and ₹4.16 lakh crore in 2021-22. The total amount of Modi government revenue from petroleum taxes over the 8-year period is ₹ 26.52 lakh crore. The total number of families in India will be almost the same which means that on average an Indian family pays ₹ 1 lakh as petroleum tax. It was a clear case of plundering the poor. The ratio of the petroleum tax to the central government’s GDP increased from 0.8% in 2014-2015 to 1.9% in 2020-2021.

    fake markets

    Fortunately for the NDA regime, its rise coincided with a drop in global crude oil prices. Tax escalation is calibrated to ensure that the gains from lower crude oil prices are not passed on to consumers and earned as additional tax revenue. The protests were silent because there was no increase in retail prices. Even at the height of the pandemic, taxes were ruthlessly raised.

    But at a time when global crude oil prices began to rise, the central government refused to cut the tax until the threat of inflation looming out of control loomed.

    In November 2021 and now in May 2022, the government reduced taxes on petrol and diesel cumulatively by Rs 13 and Rs 16, respectively. However, this is only a partial reduction of the massive increases that have piled up on the nation during the Modi government’s tenure. The government is unwilling to roll back the full tax increase on petroleum that was imposed from 2014. The Modi government is clinging to an effective surcharge of $12.27 for petrol and INR 10.47 for diesel, which has been added since coming to power.

    generalized inflation

    Another factor that raises the cost of inputs is the depreciation of the Indian rupee. From $64 to the dollar, the exchange rate fell to nearly $78 to the dollar. This means that to import the same units of goods or services purchased at Rs 64 in 2014, importers will now have to cough up Rs 78.

    The Wholesale Price Index (WPI) has remained well above the CPI, and in April 2022 it climbed to a 30-year high of 15.08 percent due to the overall price hike across all sectors. The persistently high input prices may be absorbed by the manufacturers in the short run at the expense of their profits but in the medium term they will be carried over to the retail prices. So, the worst is yet to come.

    Beneficiaries of inflation

    The final buyers, the consumers, will have to transfer a large part of their income to sellers – dealers and manufacturers. Inflation is the process of transferring income from buyers to sellers. The primary producers whose markets are dominated by the former are unlikely to benefit from the commodity boom. The government also benefits, as our short discussion on oil prices showed. But the people and the country will lose.

    A recent Oxfam report, Exploitation from Pain, found that every 30 hours a billionaire is born while nearly a million people plunge into extreme poverty. The system is too rigged, whether it’s Covid recession or post-Covid inflation, the rich win and the poor lose.

    Countermeasures

    The main anti-inflation intervention was to raise the interest rate by 0.4 percentage points and the required cash reserve ratio for banks by 0.5 percentage points. It is clear that the policies pursued over the past two years will be reversed in the coming months and monetary policy will retreat to pre-Covid anchors.

    The above approach assumes that excess demand is a major factor in stimulating inflation. But more importantly, supply-side constraints lead to higher costs. It is more cost-push inflation than classic demand-pull inflation. Attempting to reduce demand will have dire consequences for growth. It can undermine recovery.

    Therefore, more aggressive measures are required from the supply side. All additional taxes on petroleum products will have to be rolled back. Grain purchase must be accelerated and the public distribution system strengthened. Oligopoly pricing by business house cartels should be reduced and competition encouraged. It should be noted that the southern states of Kerala and Tamil Nadu, which have a more robust public distribution system, have relatively lower retail prices than the rest of the country.

    (Dr. TMThomas Isaac is the former Finance Minister of Kerala) (Syndicate: The Billion Press)