Need to cut fuel tax to rein in inflation demon
At times, those trying to help can end up hurting us the most. Policymakers taking on rising inflation is a case in point. On Friday, the RBI raised retail inflation projections for FY22 by 60 bps to 5.7%. In fact, even for the first quarter of next fiscal, it’s expected to continue hugging the higher bound of 2-6% target. The central bank, keeping a ceaseless vigil on growth—designating inflation to an understudy—maintained that the persistent price rise is transitory, caused largely due to volatile global commodity prices, especially crude oil and demand-supply mismatches. But what counts as ‘temporary’ impacts differently for citizens and the central bank. As Deputy Governor Michael Patra explained, headline inflation hurtling past 6% post-Covid will follow a glide-path reduction stretching multiple quarters. It means policymakers can escape with a whole skin as long as the annual average inflation print cuts below 6%. But for households, if prices peak for over 12 months without missing a beat, its effects are both disastrous and permanent.
Inflation-adjusted real rates have been negative for over a year, eroding returns from bank deposits and incomes, and prompting savers towards riskier assets. With real incomes falling, the bite is even harder for rural consumers—the segment on which the central bank is pinning hopes of a private consumption bounceback. But there is little that the RBI can do to tame prices at this juncture as tinkering with policy rates will only damage growth prospects.
This leaves us with the Central government, which is holding a wild card (fuel taxes) that can soften inflationary pressures instantly. With direct tax collections in Q1 shooting up an unprecedented 112% and net tax revenue, after adjusting for state transfers, jumping above 200%, the Centre clearly has enough elbow room to roll back excise duty hikes on petrol and diesel. This view was seconded by none other than the RBI, besides others. Just last fiscal, the Centre mopped up a mighty `3.5 lakh crore in fuel taxes. It’s high time to pare them down.