Ease some burden inflation is high fuel prices are distorting consumption taxes need to be cut

Ease some burden inflation is high fuel prices are distorting consumption taxes need to be cut

The southwest monsoon fully covered India on July 13, late by five days. Rainfall patterns in July and August are most crucial for the kharif agricultural season. Early indicators are bothersome, since rain delays influence sowing. On July 9, year-on-year comparison showed that this year there was a reduction of 5.8 million hectares, or 10.4%, in the area sown. It’s still early days and this may eventually not be material to farm supply and future food prices. But current trends in food prices are no longer something to be dismissed.

India’s consumer inflation trajectory has been rising for two years. Retail inflation, CPI, averaged 5.9% in 2014-15 and then trended downwards for four years. It was 3.4% in 2018-19. Since then, it has reversed direction to average 4.8% in 2019-20 and 6.2% last year. Food prices have pushed up retail inflation and over the last six months there has been a steady increase. Strangely, core inflation, which strips out food and fuel, has been hovering around 6% even though aggregate demand remains weak. Like most central banks, RBI believes the current trend is temporary, driven by supply disruptions across the world.

India’s economy today is defined by the undesirable combination of high inflation and weak growth. RBI has to continue prioritising economic growth and will keep interest rates low. But GoI can ease the situation for India’s battered consumers. Fuel prices are going through the roof because of increasing crude prices and sky high taxes. Data collated by SBI shows that fuel prices are crowding out discretionary consumption. A large sample of the bank’s credit card spending pattern shows that expenditure on oil has cut into spending on grocery items. GoI needs to cut fuel taxes partially to mitigate the impact from inflation and limited economic opportunity. Consumers need a break.