Reduce Petro Products Prices Drastically To Bring CPI Inflation To 5 Per Cent

The tentative Consumer Price Index (CPI) inflation for July 2023 is 7.44 per cent, going much beyond the upper limit of 6 per cent.

With CPI inflation at 4.7 per cent, 4.31 per cent, and 4.78 per cent in April, May, and June 2023, it was hoped that the government and the Reserve Bank of India (RBI) together would rein in CPI inflation in FY 2023–24. But it appears that it is not so.

After about 10.13 per cent CAGR (Compound Annual Growth Rate) of CPI inflation during the UPA 2.0 regime, the Modi 1.0 government reined in CPI inflation with a CAGR of 4.49 per cent, lower than the median value of the CPI inflation target that the RBI and the government mutually agreed upon.

However, the Modi 2.0 government could not rein in CPI inflation as much as it did successfully in the Modi 1.0 era.

It was 4.8 per cent, 6.1 per cent, 5.5 per cent, and 6.7 per cent in FY 2019–20, FY 2020–21, FY 2021–22, and FY 2022–23, respectively, resulting in the CAGR of CPI inflation of the first four years of the Modi 2.0 government at 5.77 per cent, racing beyond the median value of 5 per cent.

On the Karnataka assembly election day in 2023, Finance Minister Nirmala, after casting her franchise, said the current inflation is much lesser than what India witnessed during the UPA 2.0 era.

The same thing was echoed by Prime Minister Modi while speaking at a public meeting in Rajasthan. The government stand is clear—our inflation management is better than UPA 2.0.

However, the public may not concur with the government's stand. There are many reasons for this. The first is that the public may like to compare the CPI inflation of the Modi 2.0 era with the Modi 1.0 era rather than the UPA 2.0 era.

Even if the CPI inflation in FY 2023–24 stays within the 5 per cent–6 per cent band, the inflation in the Modi 2.0 era will be about 1 per cent–1.5 per cent higher than the Modi 1.0 era. People perceive the current headache as more painful than the severe stomach ache they witnessed 10 to 15 years ago.

Historically, India has witnessed a CAGR of 6.7 per cent CPI inflation since FY 1950–51 until FY 2013–14, as per RBI data. The Modi 2.0 era CPI inflation is certainly lower than that.

However, this comparison is for academic exercise and not for public consumption, as the public cannot get solace from looking at past data of higher inflation than the current inflation data.

The second one is due to the pandemic; like the rest of the world, India also suffered from negative growth in GDP in FY 2020–21. The positive GDP of 8.5 per cent in FY 2021–22 was only to compensate for the negative GDP of 6.6 per cent in FY 2020–21.

The per capita GDP of FY 2021–22 is about the same as that of FY 2019–20. Only during FY 2022–23 did India witness 7.2 per cent GDP growth. All put together, India witnessed a CAGR of GDP growth of 3.14 per cent in the first four years of the Modi 2.0 era. Even if India grows at 7 per cent in FY 2023–24, the CAGR of GDP growth in the Modi 2.0 era will be only 4 per cent.

Due to the pandemic, the denominator is the same across the world, and many countries witnessed much worse inflation and extremely poor GDP growth compared to India.

Had Modi lost the confidence of the people, these pragmatic facts would have never appealed to the public. As Modi resonates very much with the public so far, the disenchantment of the public with high inflation and low economic growth has not created anti-incumbency so far.

But economic distress at the personal level is more emotional than logical; except in communities that vote based on instructions from their places of worship, Indians vote looking at how their economic condition has improved or deteriorated.

Inflation is like blood cancer, but it will take the sheen of the ruling dispensation faster than many would believe.

The UPA-2 era became very unpopular, not because of policy paralysis, huge corruption, or lacklustre leadership alone. The tally of UPA was reduced to a double digit because of the unbearable burden of CPI inflation.

It is not that the government did not take enough measures to rein in CPI inflation. The central government provides 5 kg of grain per person for the 80 crore population. It banned wheat and rice exports.

On the part of the RBI, it hiked the repo rate to 6.25 per cent with successive rate hikes; taking it beyond this level will affect loan offtake and ultimately reduce GDP growth.

There is no perfect correlation between the repo rate and food inflation, although there is a reasonable correlation between the two. However, the CPI inflation target of 5 per cent has been eluding the government since FY 2021–22, as one or more commodities in the CPI basket increase exorbitantly.

The tomato may be a tiny part of the food inflation, but when the tomato prices increase by fivefold, it certainly has an impact on the Consumer Food Price Index (CFPI), as the July 2023 CFPI was 11.51 per cent.

What is the way forward for the government?

Managing the inflation of various items in the CPI basket is one way of controlling the CPI inflation. As there are 448 and 460 items in rural and urban areas in the CPI basket, it is practically impossible to manage each item not to spiral up as tomato played the spoilsport in July 2023 CPI inflation. 

India, like the rest of the world, has been moving towards electric vehicles, and the tendency of the governments to consider taxes on petrol and diesel to mop up resources should end sooner than later as the governments five years down the line must learn to live with much reduced tax revenue from petroleum products.

Not only the central government but also the state governments gained substantially from the buoyancy GST witnessed post-Covid era. Let the indirect tax of GST and the direct tax of corporate tax and personal income tax become the staple resources for governments to overcome the electric vehicle shock they may have to witness in the years to come.

The state governments cannot absolve themselves of the CPI inflation rise as the national inflation data is the aggregation of state-level CPI inflation data on a weighted average. If the states can manage CPI inflation well, the national CPI inflation will also be under control.

The one measure that could bring down CPI inflation to less than 5 per cent is to drastically reduce petrol and diesel prices. On 4 November 2021, the central government slashed the diesel and petrol prices by Rs 10 and Rs 5 on petrol and diesel, respectively, when the international crude oil price was at USD 73 per barrel, and there is neither upward nor downward revision from thereon. It also requested that the state governments reduce the taxes on petrol and diesel, but only the BJP-ruled states obliged.

In August 2023, the international crude oil price will be about USD 82 per barrel. Despite the increase in international crude oil prices compared to November 2021 levels, the central government should slash diesel and petrol prices by Rs 20 and Rs 10, respectively.

It also should request that the state governments reduce their taxes in such a way that they slash their prices by Rs 20 and Rs 10, respectively, on par with the central government. The states that did not reduce petrol and diesel prices at the request of the central government in November 2021 may not decrease them now.

Let the difference between states that reduced and those that did not reduce petrol and diesel prices be stark. Such a huge difference between petrol and diesel prices across states will also result in a difference in CPI inflation across states.

The government and RBI have introduced many measures to control inflation within the median value of 5% since FY 2021–22, but they have witnessed little success.

If it wants to succeed in FY 2023–24 on CPI inflation control, it must slash petrol and diesel prices drastically along with the cooperating state governments, and it will have a carpet bombing effect on the inflation of items in the CPI basket.