In India, the rate of inflation, measured whether by wholesale price index (WPI) or consumer price index (CPI), has declined lately. WPI rose at above 10 percent for 18 months, peaked in May 2022 at 16.63 percent and came down to 8.39 percent in October 2022. CPI inflation was at above 6 percent (above RBI’s par-for-the-course band) for 10 months and declined to 5.66 percent in December 2022. But is the recent decline in the rate of inflation any consolation for the unorganised sector, constituting 94 percent of the workforce? The answer is no because fall in the inflation rate does not translate into falling prices. It only means the rise is not as galloping or steep as it was earlier.

Inflation containment is one area of government functioning that is the most difficult and vexing. Traditionally that role is assigned to the central bank which in our country is the Reserve Bank of India (RBI). Till recently, the RBI has been increasing the repo rate (the rate at which commercial banks borrow from it) in lock step with the US Fed Reserve’s policy of steady hike in interest rates under the Keynesian if facile belief that the most direct cause of inflation is too much money chasing too few a goods and services. So, the monetary policy of most of the nations has been to apply brakes on money supply by hardening the borrowing rates thus discouraging borrowing and thereby reducing the money sloshing around. Toeing the US line has become necessary because the Indian economy is now inextricably linked with the global economy.

However, attributing inflation to money supply and money supply alone would be simplistic as the Indian, nay, the world experience shows. For, inflation is attributable to supply side constraints also all the more so in the globalised world with global supply chains. For example, the rise in prices of cars the world-over post-pandemic is mainly due to shortage of ‘chips’ a vital part in all electronic devices. All modern cars function in a computerised system to a substantial extent. Another example of supply-side inflation is world crude oil prices. India depends on imported crude to the extent of 80 percent and any gyration in international crude prices affects the inflation rate of the Indian economy significantly. To wit, if the diesel price goes up by 10 percent, prices of milk, vegetable, pulses and other eatables go up in sympathy.

So, the short point is the Finance Minister’s task is unenviable. She does everything in her power to increase production. For example, new companies have to pay just 15 percent corporate tax but not many have taken the bait. Make-in India needs to be marketed more aggressively and Indian industrialists who had taken wings must be wooed back assiduously. Indeed, manufacturing which accounts for just 17percent of the GDP needs all the encouragements and fiscal incentives so that it can contribute at least 25% of the GDP sooner than later. The MSME sector is vital in this regard accounting as it does as much as 85 percent of the production in India. A three-year tax holiday for them both from direct taxes and GST may revive the Covid battered sector but if it is found difficult, at least they may be allowed to pay up their taxes in a staggered manner. Revival of manufacturing can ease supply-side pressure and inflation.

It is no secret that fuel taxation and GST belong to the indirect taxes’ genre. But they are low-hanging fruits with their demand being inelastic. So, the excessive dependence on the two by the government is not only fueling inflation but also regressive. Progressive taxes contain in greater reliance on direct taxes vis-à-vis indirect taxes. It may not therefore be far-fetched to suggest that capital gains from the share market be fully taxed at par with the hard-earned salary income and wealth and inheritance tax be revived this time round in a rational manner without picking and choosing. The money supply thus sucked out from the rich indeed can at once be anti-inflationary besides correcting the tax-skew in favour of the rich.

But then it won’t be easy as vested interests may sulk and fume and being more vocal and articulate can scuttle such well-intentioned moves. One hopes the finance minister walks on the eggshell gingerly.

—The author, S Murlidharan,

is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed in the article are personal.

Read his previous articles here

(Edited by : C H Unnikrishnan)