By Anjan Roy
As the petrol and diesel prices are creeping up almost day by day, the general public is wondering what is happening. Politicians are shouting hoarse and demanding a government hand in checking the rise. Everyone is saying the petroleum products price hike will at the next stage spill over the rest of the economy and all other prices will also go up.
On the other hand, the food items’ prices are also inching up. More than the food grains, it I the vegetables and fruits and protein prices which are showing a greater than normal spurt. So, there is the common man agitated and debating if these are government failures.
There are the others as well who get agitated whenever there are movements in the prices. It is their business to do so.
A sudden spurt in inflation print in May has set economists arguing if this was a transient phase or the inflation pressure was likely to take full grip in the forthcoming months.
The latest figures indicate that the retail inflation in May has spiked to 6.3 per cent and the wholesale price index shot up by over 12 per cent. The Reserve Bank takes the retail inflation measure as the benchmark for settling its monetary policy.
Two weeks back, the Reserve Bank in its bi-monthly review kept the policy interest rate unchanged, stating that the recovery process in the economy needs support from all sides. For six consecutive reviews the RBI has stayed away from raising interest rates to encourage growth.
The question that is being debated now is what price for growth. Is inflation control right away is the right policy or whether the current spike in inflation rates are a transitory phenomenon needing some indulgence from policy makers. Is it time to take some initial measures to rein in “inflationary expectation” right in the beginning.
An examination of the disaggregated inflation measures show that the current spate of rising price index is mainly due to a sharp spikes in food and fuel prices.
Fuel prices increase is mainly on account of the global rise in oil prices in response to the recovery of major economies. After falling consistently for months, the oil pries are once again northbound mainly from higher demand from China, India and Western Europe.
At one point of time, oil price had touched $40 for a barrel which is now creeping above $70. Oil market experts believe that prices should keep creeping up with supply side uncertainty. Saudi Arabia, world’s largest producer, had checked its oil output to keep the market high.
But, the international price spurt apart, fuel price in the domestic market is the end result of huge imposts both from the centre and the state governments. Neither petrol nor diesel are included in the GST and as a result, the states are clamping large doses of tax on petroleum products.
Asked to lower the state dues, these government point out that the centre has put cess on petrol which it would not have to share with the states. All cess hikes go exclusively to the centre and the states are left high and dry.
Where do the states generate their additional resources, when the expenses on their count were rising in the aftermath of the outbreak of the pandemic, the states have pointed out. The states have sacrifice 70 per cent of their revenues as these have been subsumed in consolidated GST structure.
As for food prices, there are those who argue that the sudden increases in food items’ prices are due to supply bottlenecks. The transport and distribution networks have been badly disrupted in the covid lock down periods.
As a result there are pockets of sharp prices hikes combined with price falls in production centres. Therefore, these prices should tend to even out and the food price inflation should moderate once the supply side linkages once again pick up with infection rates easing.
Additionally, the monsoon prospects are bright with meteorological predictions placing normal rainfall this season. It is likely that the country will end up with another season of large foodgrains crops and comfortable supplies of fruits and vegetables.
One had to recognise the fact that these are genuinely difficult times and the economy has been devastated by the pandemic now entering its second year. What is worse, the repeated and intermittent lock downs and closure of activities has affected economic activity and income generation. Employment has shrunk. Regenerating employment is the first requirement which can increase overall demand.
We can do little about the price of petroleum products and the best would be to accept the oil price hike and plan accordingly. High prices of these products should eventually help in reconditioning the economy to adjust to using smaller quantities of the imported oils.
The food prices should eventually taper off to a secular level once the supply disruptions go and markets start functioning. Large buffer stocks should be released whenever there are price spurts and farm infrastructure building announced last year should also help in containing wastage.
For the sake of letting the Indian economy recover from devastating effects of the pandemic since last year, it is good wisdom to tolerate a bit of price hikes and yet let the process of recovery unhampered. (IPA Service)