Monday, January 24, 2022
- Advertisement -

Peak Inflation: More taxes to check high deficit

 The highest wholesale price inflation in decades at 14.23 percent may result in high deficit leading to levying of more taxes.

The government expenses are certain to rise even if it wants keep the deficit low at least on papers around 6 percent. It is a difficult task but necessary as per international norms. The budget would be interesting to watch as the consultations with agriculture, industry, kisans and financial institutions begins. 

An interesting aspect is that all these groups want check on inflation but all the same struggle for having better prices that contribute to an inflationary trend. The government has also started the process of domestic production of semi conductors, and batteries for the car industry. This is the contrived solution to counter international rise in prices. But it is not sure that steps taken to acquire lithium mines or increase semi-conductor manufacturing or edible oil production would be a solution.

The price rise is heightened by muted factory output at 3.2 percent. This has led Asian Development Bank to scale down India’s growth estimate to 9.7 percent, almost close to the rates of the RBI at 9.5 percent. 

It is the highest since 2005 and surpasses the recent October figures of 12.54 percent. This is spiked by high petroleum products, gas prices at 39.81 percent, mostly due to high component of excise and other taxes. The manufacturing prices are also high at 11.92 percent causing a severe crisis like situation in the textile sector. 

Domestic edible oils have spurred at a very fast rate at over 50 percent in the last one year. Even commonly used mustard oil shot up to Rs 214 a litre from approximately Rs 85 to 90 a litre. 

The RBI is concerned of the impact of high toll, fee, excise and other charges for the rise in commodity prices. The rising prices are making most commodities unaffordable as there has also been loss of jobs or cut in wages. The food grain prices rise by 4.88 percent, not low but moderated by free food grain doles through public distribution system. Else the food grain prices too could have soared to a high.

One interesting aspect is that high prices show GDP look brighter. Inflation-engineered high expenses show the growth in “positive” light though in reality it depresses purchasing power and adds to many other woes including contraction of wages a normal for many industries. Inflation naturally adds to the problem. It becomes difficult to afford high prices at low wages. 

Food inflation especially in staples like pulses and edible oil is the last thing any political party wants in the run up to a crucial election. With just weeks left for the elections in five states, including the all-important state of Uttar Pradesh, it is no wonder the central government has started taking measures to control prices through various measures. The uncertainty of kharif product due to a not so well distributed monsoon has made the government jittery about uncontrolled inflation in the days to come. Sustaining the free dole for long is not practically possible but withdrawal also has political implications.

The high fuel prices are being tried to be countered with more battery-powered cars and being self-sufficient in producing lithium batteries. It aims at saving about Rs 2.5 lakh crore in import of crude! But the new effort is capital intensive, expensive and has high prospecting cost. It plans to buy 12 lithium and cobalt mines abroad. The National Aluminium Co Ltd will hold a 40 percent stake in the joint venture called Khanij Bidesh India Ltd, with Hindustan Copper Ltd and Mineral Exploration Corp Ltd controlling 30 percent each. Apparently a wise move but lithium is not widely available. Its mining and processing costs are very high. The Khanij Videsh is two-year-old and so far it could not achieve the kind of success it was expected.

Chinese companies control most such mines in Australia, Chile and Argentina. Australian Prime Minister Scot Morrison had discussed about Indian participation in critical metallic sectors. The progress is slow. Apart lithium production cost is high and with rising shipping costs overall cost becomes oppressive. It would not be easy to produce lithium and lithium-batteries at affordable cost or save on foreign exchange. Apart lithium reserves are not high and the prospective mines may not necessarily produce as much lithium as the world demands.

A caution is needed before rushing for such a venture.

Though the new battery industry is trying hard for a fillip, it seems that battery powered cars may not be an economic solution. Overall so far despite all its complexities petroleum remains the versatile fuel and for long the world may not get rid of it howsoever it may like. 

Most efforts often are crisis-led solutions and ignore the problems as the implementers are competing for kudos and high profits. India should better move slowly on battery production and electric cars. So far 20 companies have shown interest in producing lithium batteries.

Lessons must be drawn from semi-conductor crisis. There is also the problem in getting the chip essential for manufacturing semi conductor. It has hit the passenger vehicle industry hard. Automobile production has reduced by 19 percent to 12.88 lakh units from 18.88 lakh units. Scooter, mobikes, three-wheeler productions have all been affected because of the chip scarcity. Federation of Automobile Dealers Association president V Gulati says that automobile sales remain in the negative zone. 

The government’s Rs 76000 crore manufacturing programme may give it a boost but again the basic issue of how to have the chip would remain. It seems that globally chips itself are in shortage. 

Similarly there is 20-30 per cent year-on-year rise in prices of edible oil. A public distribution department note says despite cut in import duty, a sudden spurt in prices edible oils/oilseeds has been observed which may be due to alleged hoarding of it by the stock holders. Thus, all edible oils have seen significant increase across the country. The average retail prices Rs 132 to Rs 177 a litre. 

So there can be programmes but solving the crisis in critical areas may not be easy. The impending shortages and cartelization may result in overall price hikes. If the fuel crisis is not solved it is likely that inflation in Indian situation would continue to be a bane.

- Advertisment -

Most Read

- Advertisment -