The official figures, showing inflation at 44-month high of close to eight per cent, are grossly under-estimated. In these columns (Government inflation data is fake; May 4, 2008), I had explained this situation. RBI Governor Dr Reddy has now confirmed this.
On the fourth anniversary of the UPA the economy is in a mess. All the steps to contain inflation in the last three months have resulted in more inflation. The duty cut on imports that the Finance Minister announced in two instalments in March and April have been cancelled out by a falling rupee making imports costlier. And now the government is in a bind over the spiralling petroleum price on which it has no control.
What is surprising is not that the inflation has not been controlled. But the UPAs total failure to tackle the situation. For the last 12 months crude oil prices have increased from 60 dollar per barrel to 129 dollar per barrel. The crude price was on the rise for almost 18 months. But the UPA could not firm up a policy to deal with the situation. Now it is considering various options including slapping a three per cent cess on income and corporate taxes to tide over the oil crisis projecting that the oil companies have incurred a loss of Rs 2 lakh crore this fiscal year.
With the CPI(M) calling the shots the UPA has only limited options. The best and safest before it is to cut customs duty, excise and ad valorem duties and ask the state governments to reduce sales tax to reasonable limits. A rationalisation of sales tax at say a maximum of 10 per cent is long over due. Some states are charging up to 30 per cent sales tax on petroleum products. UPA-ruled states like Maharashtra, Tamil Nadu and West Bengal have the highest sales tax rates. The five per cent customs duty that the centre charges on crude imports can also be reduced or fully withdrawn. Since oil prices are on a spiral ad volarem duties only mean needless windfall tax gains. There are many anomalies in the fuel pricing. The government and corporates together work as a cartel even in these times of calamity. Studies have shown that almost half of the price per litre of petrol and diesel is made up of various taxes. For long there has been a sound case to reduce this. The Finance Minister has been resisting this on the plea that it will result in revenue losses and increased deficit. But the consumption of petroleum products and their price have more than doubled in the last couple of years and this has correspondingly increased government revenue. Every time crude oil price go up the government and corporate revenue also go up. So there is some merit in the CPI(M) suggestion that the government tax the corporates who made windfall profits because of the oil price rise. But the UPA will not agree. It is looking for soft and politically correct devices. The petrol crisis has not come in a day. But the UPA is behaving as if an unforeseen calamity has hit the economy.
Like in the matter of food crisis and inflation the UPAs ineptitude is evident in all this. The sadder side is that even its supporters are not willing to give it benefit to argue on unexpected vagaries. For instance, on May 22 Dr Manmohan Singh celebrated the fourth anniversary of his government. The Left refused to join the celebrations but shared the dinner table. The Samajwadi Party leader Amar Singh, who joined it, too, later said at last after four years the UPA has learnt to extend social courtesies. But that does not mean a tie-up, he added. At the third anniversary celebrations Mayawati, the UP Chief Minister, was the prima donna. This time she rejected the invitation. What does all this mean? That no party wants to own up this government except the Congress. The CPM has, according to reports, called a meeting of its central party solely to discuss the failures of the UPA. That is a long list. Its most ambitious plank, in which the Prime Minister and Sonia Gandhi had staked the prestige of the governmentthe Indo-US nuclear dealis now as good as buried.
What is there for the government to show after four years? It is a lame duck government with general elections only ten months away.
Its report card mentions the global factors leading to high inflation rate. Global factors cannot conceal the fact that the economy is on the brink of a disaster. This government, which has woken up in its last year to make shallow promises to farmers, and took to mindless, populism for votes, has failed to control inflation while the fiscal prudence has been thrown to the winds by reckless off-Budget announcements.
The Reserve Bank Governor Dr Y.V. Reddy has described Indias fiscal deficit ratio to the GDP as amongst the highest in the world, with several underlying fiscal pressures not entirely evident in the numbers put out by the Finance Ministry.
The official figures showing inflation at 44-month high of close to eight per cent, are grossly under-estimated. In these columns (Government inflation data is fake; May 4, 2008), I had explained this situation. Governor Dr Reddy has now confirmed this. This is what RBI chief has recently stated: Yes, it (WPI-based inflation data) under-estimates the inflation number. There are underlying inflation pressures. He went on to say: The current high level of inflation is totally unacceptable, especially in terms of impact on inflationary expectations.
And it is not only the Reserve Bank Governor who said that the inflation figures are under-reported. The Economist, London, in its latest issue has said that the figures published by the Indian government would be revised to 10 per cent. This is what it said: Delays in data collection in India can mean big revisions to inflation: the final number for early March was almost two percentage points higher than the original. The latest wholesale price inflation rate might therefore be pushed up to 9-10 per cent.
As a result of real inflation crossing 10 per cent, millions of people who live on the income from their small savings in the banks and post offices, watch helplessly the erosion in their money value. While the bank and post office deposit rates fetch the depositor less than 8 per cent, the double digit inflation leaves him with a minus two per cent return. Where will be the incentive to save? This calls for a more realistic interest rate revision. That will, however automatically push lending rates high making the manufacturing sector unviable and EMIs unmanageable for small loaners.
And as there is no incentive to save, people would rather spend generating more pressure on the demand which cannot be matched by adequate supply despite the government tom-tom of plus eight per cent GDP growth.
To sum up central government finances are in a disarray. While Chidambarams Budget pegged the fiscal deficit at 3.1 per cent of GDP in 2007-08, in reality it would be well above five per cent as off-budget items are added.
The much-touted debt waiver of Rs 71,680 crore is an off-budget item. The Sixth Pay Commission will have to be implemented soon. So are the bonds being recklessly issued to the oil marketing companies. Government is issuing these bonds, as if there is no tomorrow. Which government will pay, how it will pay? Is the UPA not being irresponsible by passing the debt on to future generations?
Chidambaram and the Prime Minister through their populist machinations in an election year has landed the economy which they inherited in a robust shape from NDA in the sick home. As in the case of fuel crisis it is come-uppance time for the UPA. Does it have the courage to raise the pump prices; or is it held hostage to the ever-black-mailing Left parties? As the crude prices go up and the import bill shoots up, taxes and duties must come down so that the common man does not suffer. As it is, he is paying the price of the fiscal profligacy.
The UPA governments economic report card is poor to say the least and it has hurt the poor more. Food prices which have shot up by over 150 per cent in the last two years have pushed millions of people below the poverty line, while this government has launched a blitzkrieg to celebrate four years of its inefficient governance.