High inflation poses challenges for India’s economic recovery

Gasoline has become more expensive by 24.7% (Rs 20.73 per liter) so far this year, while diesel has seen an increase of 26.1% (Rs 19.3 per liter) this year. nowadays.

Just two days ago the International Monetary Fund (IMF) said India’s economy was gradually recovering after being hit by two waves of Covid, but warned authorities against inflationary pressures. As India’s economy recovers from two waves of the pandemic, inflationary pressures continue to lurk around it. Government intervention in this matter, according to many experts, is selective and will not solve the problem. Let’s take a look at the factors that contribute to inflation and whether the government has taken enough action to address them.

According to a Bloomberg Quint report, since the pandemic hit the country in March 2020, the consumer price index rose 9.8% through September of this year. Since the start of this year alone, inflation has risen by 5.2%.

The specific contributors primarily responsible for this inflation build-up are oils and fats, food and beverages, vegetables, fuel and lighting, and transport and communications.

Oils and fats

Retail price inflation for edible “oils and fats” reached the second highest level in 2021 in September. Consumer price inflation (CPI) for oils and fats jumped 34.19% in September, slightly below June’s 34.78%.

In its attempt to remedy the situation, according to a statement released this week, the government has now imposed stock limits on stocks, which are expected to remain in place until March 31 of next year.

Earlier this year, the Indian government cut the standard tariff rate on crude palm oil, crude soybean oil and crude sunflower oil to 2.5% in September, after a drop in August and June. As 60% of the edible oil consumed in the country is satisfied by imports, the standard rate of duty on refined oils has also been reduced.

A file photo of a vendor promoting cooking oils at a Walmart India store.

Compared with the 34.2% increase in inflation for oils and fats on an annual basis, prices rose 2.2% in September, according to government data. This rate is lower than the rate of increase observed earlier in the year.

Government intervention has certainly helped to mitigate the rapid rise in the prices of oils and fats. However, it did not lower prices to pre-2021 levels, let alone pre-pandemic levels. Edible oil prices also continue to rise due to high world prices.

The high cost of oils and fats has increased the suffering of the middle class and the poor, who have already been battered by the pandemic.

Legumes and vegetables

Between January and September, pulses were another category in which higher prices contributed 0.2% to the rise in inflation and the government had to intervene. On an annual basis, inflation in the pulses category remained stable at 8.8%

The Indian government, in an effort to reduce pulse prices, not only issued stock limits in July, but also took steps to crack down on hoarding and speed up the clearance of shipments.

Sunday’s trade data showed the prices of vegetables, especially onions and tomatoes, are rising in urban areas, including the nation’s capital. The vegetable category made a negative contribution of 0.6% to inflation between January and September, also due to a recent drop in prices.

Data from agricultural commodity market committees showed tomato prices soared to ??60-65 per kilogram (kg), while onions were selling ??50-55 in Delhi, Patna, Kolkata and Mumbai, up ??20-25.

Due to crop damage in Madhya Pradesh and Maharashtra, tomato prices have risen sharply.

The government is trying to stabilize the prices of onions as its prices often fuel food inflation and impact the monthly budgets of consumers, poor or rich, as it is a staple ingredient in most Indian dishes. The government tried to stabilize prices by offloading the buffer stock. A press release from the Ministry of Consumption, Food and Public Distribution, released on Sunday, indicates that the Ministry of Consumption has undertaken a calibrated and targeted release of the onions from the tampon on a first-in, first-out basis. , started last week of August 2021.

Onion inflation has shown signs of reversing, declining 9.6% per year in September, compared to an increase of 24% in August. However, prices rose again due to higher fuel prices and damage to summer crops due to heavy rains.

Fuel and transport

After increasing the fuel prices for the consecutive court day, the cost of gasoline and diesel ??105.84 per liter and ??94.57 per liter respectively in the national capital Delhi.

Following the end of the three-week long hiatus in tariff revision in the last week of September, this is the 16th increase in gasoline prices and the 19th increase in diesel tariffs.

Of the 5.2% increase in the index, a total of 1.5% came from transport and communications, as well as fuel and lighting. While transport and communications contributed 0.9%, fuel and lighting contributed 0.6% to the increase in inflation.

Retail prices of fuel and LPG continue to rise due to the lack of government intervention.

Gasoline has become more expensive by 24.7% (Rs 20.73 per liter) so far this year, while diesel has jumped 26.1% (Rs 19.3 per liter) since the start of the year. For a consumer, a refill of LPG has cost Rs 205 (or 29.5%) more expensive since January. In most countries, gasoline has crossed the Rs 100 mark, while diesel rates have crossed that level in a dozen states / UTs including Madhya Pradesh, Rajasthan, Odisha, Andhra Pradesh, Telangana, Gujarat, Maharashtra, Chattisgarh, Bihar, Kerala, Karnataka and Ladakh.

An Indian Oil gas pump with a poster thanking PM Modi for the free Covid vaccine.

Although recent increases after September can also be attributed to soaring international oil prices, prices had already exceeded Rs 100 for gasoline in many cities.

Rising fuel prices ultimately impacted transportation costs, and likely will until the government steps in to control prices.

A major contributor to the high rates is the excise tax imposed by the central government on fuel. A Rs 5 cut in excise duties on gasoline and diesel will reduce retail prices by around 5-5.5% to current levels, according to estimates by Yuvika Singhal, an economist at QuantEco Research, reported Bloomberg Quint.

Long road to recovery

Although GDP has shown significant gains towards returning to pre-pandemic levels, high inflation has ensured that the common man does not get a break. Rising prices for oil, vegetables and fuel have severely affected the budgets of the middle class and the poor.

The government’s approach has shown that while it has intervened to reduce the costs of sensitive food products, it has refused to give in to calls for intervention on fuel prices.

Even a reduction of Rs 5 in excise duty on fuel will have a direct impact of around 8-10 basis points of softening on CPI and WPI inflation, according to Yuvika Singhal notes, according to Bloomberg Quint . “As such, a cumulative 15-20 basis point moderation on retail and wholesale inflation can potentially be achieved,” she said.

Although petroleum products are an essential source of revenue for the government, it can benefit from reductions in fuel tariffs. Fuel tariff cuts can have cascading effects that will not only help the government increase GDP and control inflation at the same time.

However, if the government refuses to intervene to reduce fuel prices, the road to economic recovery will be very long and possibly lead to more difficult times.


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