EDITOR-IN-CHIEF
Just a few weeks ago, Covid-19 was the No. 1 threat for India as it was for much of the world. But after three waves of the pandemic and massive vaccination drives to help contain it, that threat has receded in the country. In its wake, though, fresh challenges have emerged, particularly in reviving the economy, which had been in the ICU during the pandemic. While GDP figures did perk up, India is now confronting another significant economic threat: Inflation. On April 12, ministry of statistics and programme implementation data put India’s retail inflation at 6.95 per cent in March, the highest in 17 months. With this, inflation has now breached the Reserve Bank of India’s upper tolerance limit of 6 per cent for the third month in a row.
Meanwhile, the prices of most daily essentials have shot up—from food to fast-moving consumer goods, from garments to shoes and cosmetics, from cooking gas to petrol and diesel. Petrol has breached the psychological Rs 100 a litre barrier in most parts of the country, and on April 12, cost Rs 120.51 in Mumbai and Rs 105.41 in Delhi—an average 10 per cent rise in the past month alone. Higher fuel prices have had a cascading impact across the supply chain, making the production and transportation of goods dearer. With fewer jobs and a wage freeze in many firms leading to shrinking incomes, the higher prices are beginning to hurt. Many families have denied themselves small pleasures like eating out or going to the cinema to curtail their expenses, while others are postponing decisions to buy a car or a home.
Industry, too, is feeling the pinch as input costs have risen significantly in recent months. Prices of mild steel used in fabrication have doubled from just two years ago to Rs 80,000 per tonne. Stainless steel prices too have doubled, while the cost of nickel—used in stainless steel and alloys to strengthen them, and in batteries—has grown fourfold. Transportation costs have seen a phenomenal rise. For instance, between 2019 and now, shipping a container from Mumbai to Houston costs four times more. Since many firms, especially those in the MSME segment, do not have a price escalation clause added to their contracts with buyers, the rise in raw material prices directly eats into their margins, making their businesses unviable.
So, what caused prices to soar so alarmingly? One primary reason is the ongoing war in Ukraine. On February 24, when news came of Russia’s invasion, global commodity and oil prices went haywire. Crude oil touched $139 a barrel on March 7, the highest since 2008. It has now settled at $107 a barrel, which is still a 37 per cent rise over the $78 it was in end-December. As western powers came together to impose sanctions on Russia, choking supplies from that country, prices rose again. And with no sign of the war ending anytime soon, things are likely to worsen. India, which imports over 80 per cent of its crude oil requirements, was at the receiving end. Our crude oil import bill is set to cross $100 billion (around Rs 7.6 lakh crore) in 2021-22, double that of the previous year.
The other reason for prices to balloon was economies opening after two years of the pandemic, and the resultant surge in demand for commodities—oil, steel, aluminium, copper, nickel and zinc, among others. However, with supply failing to keep up with demand, the global price of these commodities soared. In India, the situation is complicated by the fact that supply-led external factors rather than a rise in domestic demand are driving the inflation. Poor demand offers no incentive for investment, leading to low growth. A FICCI survey in January revealed that capacity utilisation in most of Indian industry was 65-70 per cent.
I nflation now threatens to derail whatever little revival the economy saw post-pandemic, registering a tepid 5.4 per cent growth in the third quarter of FY22. RBI has scaled down its FY23 projections to 7.2 per cent. The central bank, which held on to interest rates during the pandemic to focus on growth, will now have to raise rates to tame prices. It is caught in a classic conundrum. Raise interest rates and risk slowing growth, keep them unchanged and stoke inflation further.
Our cover story, ‘Feeling the Pinch’, put together by Executive Editor M.G. Arun and Deputy Editor Shwweta Punj, takes a deep dive into the issue, examining the reasons behind the high inflation, its impact on the man on the street, and how it can be mitigated. Our Board of India Today Economists (BITEs) also deliberate on how inflation could impact growth and jobs, and how to resolve the issue. They recommend that the Centre take urgent measures to ease inflation, including slashing taxes on fuel, extending free food schemes, removing supply bottlenecks and giving cash transfers to MSMEs or reducing GST on specific inputs for this employment-generating sector. The government just hasn’t done enough for this critical segment, they point out, even though the Centre has the fiscal space to accommodate a reduction in excise duties on fuel and state governments have the scope to reduce VAT (value-added tax) on it.
The fact of the matter is that the Indian economy is in a deep hole. Economist Jahangir Aziz puts it in perspective in his BITE answer. “Even if FY22 growth is 8.5 per cent,” he says, “the level of GDP will be about 7 per cent lower than the pre-pandemic path. India will need to grow at an astonishing 14 per cent in FY23 to cover the loss.” A daunting task for any government.
Containing rising prices before runaway inflation sets in should now be top priority for the government and RBI. Already leaders of two of our neighbouring countries, Pakistan and Sri Lanka, have been felled for their inability to tame soaring prices and manage the economy. That is a grim warning for our policymakers to take heed and go all out to contain inflation and ease the burden on the common man.