Fire of inflation is burning India
There is a strong case for the government to wake up to the need to douse the fire of inflation. The sustained growth of fuel prices is now pinching one and all. Neither the government nor the Reserve Bank of India can remain aloof to the concerns of Inflation anymore.
Even as it prepares for another round of monetary policy committee meeting later this week, the RBI seems to have got it all wrong when it predicted a rather benign inflation, at least in the short-term. In its 10 February 2022 policy statement, it had predicted 5.7 per cent retail inflation in the fourth quarter of 2021-22 and 4.9 per cent in the first quarter of 2022-23. These predictions will be off the target by a large margin.
While the RBI cannot be blamed for not seeing the sudden turn of events at the Russia-Ukraine border and its aftermath, most analysts had agreed then also that the central bank's inflation estimates were too optimistic.
Accordingly, the RBI kept its policy stance dovish. This has to change, quickly. Interest rates need to be increased and its stance has to be changed to be less accommodative. The government, on its part, has to seriously think of another round of excise duty cuts - the last time it reduced the taxes on fuel in November.
Despite this, the government will end up with as much excise duty collections in 2021-22 as in the previous year, when it collected a record Rs 3.9 lakh crore. In the new financial year, the government must be ready to take some hit on its revenues from fuel.
According to Nomura, tax cuts similar to those in November 2021 would cost the government anywhere around Rs 1.2 lakh crore. Of course, it can hope to make good some of those losses by a robust pick-up in GST and direct tax collections.
The IPO of LIC, which could not be done in 2021-22, may also give some cushion to the government as far as its revenues are concerned. Unless the government does something about the inflation, the consumption growth would remain precarious, delaying the full recovery of the economy.