Pricey times high inflation and weak demand are both problems households need fuel tax relief

Pricey times high inflation and weak demand are both problems households need fuel tax relief

Retail inflation for April was 7.79%, the highest level recorded in eight years. More importantly, for the fourth consecutive month it breached the 6% mark which represents RBI’s upper limit of tolerance under its statutory inflation targeting mandate. The surge was led by food inflation of 8.38%. A granular look at different items of the consumer price index showed that inflation is now broad-based. Even in cereals, where India has a surplus, inflation is 5.9%, indicating that expectations of a continued increase in prices are entrenched.

Along with inflation, data of industrial output in March was also released yesterday. Overall output in March grew 1.9% over the previous year but both consumer durables and nondurables contracted. When this data is juxtaposed with the anaemic growth in volume of large consumer goods firms, it’s clear that India is now beset with both elevated inflation and weak consumer demand. Going forward, it calls for adjustments in both monetary and fiscal policies. RBI’s focus will be monetary tightening, characterised by sucking out liquidity in the financial system and increases in its policy interest rate. It leaves GoI with the task of tweaking fiscal policy to ease the pressure of elevated inflation on household budgets.

GoI will benefit from a jump in tax revenue as firms raise sales prices. Also, as nominal economic growth is forecast to be well over the interest rate on government debt, so the latter’s sustainability is not in question. This should make GoI conclude that it must begin by lowering its taxes on pump prices of petrol and diesel. It will simultaneously lower what states collect from fuel as their collections are linked to the level of GoI’s taxes. Household budgets need relief and at this juncture it can only be fiscal policy which provides it.