Shed fiscal policy rigidity

The threat of stagflation — characterised by slow growth and high inflation — is real

Inflation numbers for May — Consumer Price Index (CPI) has crossed the Reserve Bank of India (RBI) threshold of 6% and Wholesale Price Index (WPI) is at an all-time high — have underlined the precarious nature of the ongoing economic recovery. As the second wave ebbs, and restrictions are eased, economic activity is picking up. But there is a paradox here. The Nomura India Business Resumption Index (NIBRI) jumped to 76 in the week ending June 13. It posted the highest week-on-week increase of 8.1 last week. But consumer confidence continues to be low, especially among the less wellto-do. High inflation at this moment will put a squeeze on household budgets and, therefore, demand. The burden will be especially severe for the non-rich.

A spike in price of essentials hurts even in normal circumstances. These are far from normal times. Labour market conditions are weak. Employment and wage earnings have not recovered to even presecond wave levels. A large health spending shock during the second wave has destroyed household balance sheets for millions of households. The fiscal policy response ever since the pandemic hit has been largely pro-cyclical. Provisional numbers from the ministry of finance show that gross tax revenue went up in 2020-21 despite a GDP contraction. This was made possible by a sharp increase in taxes on petrol-diesel. Fuel inflation is driving both CPI and WPI, which grew at 11.6% and 37.6%, respectively, in May. Petrol-diesel prices were not as high as they are now, even when crude oil was trading above $100 per barrel. Brent Crude closed at $73 per barrel on June 14.

The government has justified the continuation of higher duties on the ground that it is essential for revenue mobilisation. But it needs to realise that it is crowding out private spending. It appears that the fiscal policy managers are banking on monetary policy to bail the economy out. While loan guarantees and cheap credit are instrumental in preventing destruction of productive capital, it cannot generate demand when consumer sentiment is low and companies are saddled with excess capacity. As inflation rises, RBI will be forced to withdraw the monetary stimulus. It is important to realise that pursuit of fiscal prudence at the moment will only lead to stagflation — low growth and high inflation.

HARIDWAR: After fake Covid testing, alleged sale of fake Favipiravir medicine has come to light in the Haridwar district. Favipiravir is an antiviral medicine used to treat mild to moderate Covid-19 disease under emergency conditions.

At State Industrial Infrastructure Development Corporation Limited (SIIDCUL), while taking cognisance of fake Favipiravir medicine being sold at some chemist shops in name of the original company manufacturing it (Life Max Cancer Laboratories), police have registered a case against unnamed people at SIIDCU police station. Owner of Life Max Cancer Laboratories, SIIDCUL Ashwini Garg had lodged a complaint to police about fake Favipiravir being sold under the company’s logo, rapper and brand name.

SIIDCUL police station incharge Lakhpat Singh Butola said when the batch number and wrapper were checked they were found to be manipulated.

He said a case has been lodged under IPC sections and the Drugs and Cosmetics Act.