Wednesday, Jun 29, 2022

How Modi Government Is Fighting Inflation To Protect Middle Class' Purchasing Power

Worried about rising prices, the Reserve Bank of India (RBI) was forced to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40 per cent earlier this month.

How Modi Government Is Fighting Inflation To Protect Middle Class' Purchasing Power
Inflation .

India's inflation seems to have spiralled out of control. The Consumer Price Index (CPI)-based inflation hit an 8-year high of 7.79 per cent in April this year, remaining above the upper limit of the Reserve Bank of India's (RBI) tolerance band of 6 per cent for the fourth month in a row.

Meanwhile, a rise in prices across all items from fuel to vegetables and cooking oil pushed wholesale price inflation (WPI) to a record high of 15.08 per cent in April.

High inflation affects the economy as spending goes down which impacts the demand for goods and services. The prices of daily household commodities have also surged significantly, making it tough for a common man to manage everyday expenses.

Worried about rising prices, the Reserve Bank of India (RBI) was forced to hold an unscheduled meeting to raise the benchmark interest rate by 40 basis points to 4.40 per cent earlier this month.

Given the current situation, the RBI is expected to hike rates by another 25-50 bps in the remaining part of this year to cut inflation.

But rate hikes take a long time before inflation comes under control and the government has swung into action to ensure that high prices don't impact consumption to an extent that it begins to hurt the GDP growth rate.

The government has been monitoring the prices of essential items as the war in Ukraine causes supply disruptions around the world, leading to global inflation.

It was earlier reported that the Union Government has set up an inter-ministerial panel to check domestic prices, shipments, and availability of Agri commodities.

In a bid to cool down inflation, here are a few steps the government has taken in the last few weeks:

Wheat Export Ban

On May 14, India announced ban on wheat exports with the hope of bringing stability to wheat prices that have hit the roof amid supply disruptions due to the Russia-Ukraine war.

Interestingly, this came after Prime Minister Narendra Modi remarked that "India will feed the world with its grains".

India, the second-largest producer of wheat globally, exported a record 8.2 million tonnes in the year to March 2022. The government claimed India could export anywhere between 10 and 15 million tonnes in the current fiscal year which ends March 2023.

The heatwave in the country in March and April has impacted wheat production. 

Wheat prices, which were already rising since mid-2020, soared by around 42 per cent in the international market in weeks following the beginning of the Russian invasion of Ukraine.

Supplies from both Russia and Ukraine have been disrupted because of the war that has led to fears of a massive worldwide shortage of grain. Ukraine’s share in global wheat exports is around 10 per cent, whereas the Russian share is around 18 per cent.

Sugar Export Ban 

After wheat export, the government has capped sugar export and put it in the 'restricted category' from June to make the availability of sugar easily in the market.

India is the biggest producer of sugar in the world and the second-largest exporter after Brazil. The country has recorded the highest sugar exports so far in six years.

The government said to maintain the “domestic availability and price stability of sugar”, it would allow exports of up to 10 million tonnes of exports during the current sugar season.

India has had a bumper sugarcane crop, and exports have been hitting record highs without domestic retail prices being affected much. However, the government was keeping a watchful eye on this commodity and has intervened to ensure availability and control its price.

A government official had earlier told Reuters that despite the record output of sugar, uncontrolled exports would lead to scarcity of domestic stocks and a spike in sugar prices, especially during festive seasons.

Excise Duty Cut On Petrol, Diesel

Finance Minister Nirmala Sitharaman on May 21 cut excise duties on petrol by Rs 8 per litre and Rs 6 per litre, respectively. This brought down the retail prices of petrol and diesel by Rs 9.5 and Rs 7, respectively.

Separately, the government will also give Rs 200 per cylinder subsidy to Ujjwala Yojana beneficiaries for 12 cylinders in a year to help ease some of the burden arising from cooking gas rates rising to record levels.

The move will come as a relief for the poor, especially those living in rural areas where the impact of inflation has been more profound.

According to Sitharaman, an excise duty cut on petrol and diesel will have revenue implications of around Rs 1 lakh crore a year for the government. In 2022, the Centre’s tax collection from petrol and diesel in 2020-21 stood at over Rs 3 lakh crore in an 88% jump from the previous year.

This reduction has led to prices of these fuels falling across the country.

Before the announcement, the price of petrol was Rs 105.41 per litre and that of diesel was Rs 96.67 per litre in the national capital.

Since fuel prices tend to have a direct impact on retail goods, a reduction in excise duty is expected to tame the prices of essential commodities.

Duty-free import of cooking oil

The government has allowed the import of 20 lakh tonnes of crude soy and sunflower oil per annum for two years at zero customs duty. It also cut basic customs duty on crude palm oil to 10 per cent till September.

Cooking oil prices have been going up for the last few months due to the Russia-Ukraine war, as both countries are major exporters of the commodity. India imports more than half of its cooking oil requirements and this will ease the burden on Indian household budgets.

Fertilizer subsidy

Amid a sharp increase in global prices of fertilizers, the government is addressing it by not passing on the price of fertilisers to the end-users, and farmers, and by absorbing it

Finance Minister Nirmala Sitharaman said the government has protected farmers from the rise in prices of fertilizers globally and an additional amount of Rs 1.10 lakh crore is being provided besides Rs 1.05 lakh crore already sanctioned in the Union Budget 2022-23.

India imports urea, potassic and phosphatic fertilisers, while global fertilizer prices have risen due to the Russia-Ukraine war.