Every time a key election approaches, the government puts up an anti-inflation façade and reduces the prices of commodities which it increased earlier. The recent reduction of domestic LPG prices by Rs 200 is an example. While the reduction is a drop in the ocean, it does provide some relief to lakhs of struggling families and should be welcomed. Persistently high inflation has been a constant alongside high unemployment and tepid growth.
In August 2023, consumer price inflation was at 6.83%. In the last 29 months, inflation has been above the Reserve Bank of India’s target level of 4%; on 16 occasions, it crossed the ‘tolerance level’ of 6%. Food inflation has been unsustainably high, crossing 10% and 9% in July and August.
An analysis of consumer prices and employment data by The Hindu shows that the cost of preparing meals has risen 65% in five years, while wages rose only 28-37%. The price rise is squeezing household budgets, leaving less room for other essential expenditures. This is also reflected in the demand slump in the larger economy.
On the issue of food inflation, the government hurriedly points towards rising inflation in developing countries ― “everybody is suffering”. This is facetious reasoning and deserves to be summarily rejected.
For the majority in high income countries, inflation impacts discretionary expenditure. In lower middle income countries like ours, inflation has a direct and often painful bearing on the quality of life. High inflation in Europe may lead to families deferring a car purchase or a holiday. In India, it leads to a reduction in food intake.
Weeks ago, when tomato prices crossed Rs 100/kilogram, most households drastically cut consumption. A survey from early 2023 shows that rising milk prices led to 40% of families either reducing milk intake or stopping it altogether. Food inflation contributes to rising malnutrition and the country’s poor standing in the hunger index. Indian consumers lack the financial stability of their Western counterparts, and any comparison between them must account for these wide disparities.
However, even if comparisons without context are made, a bleak scenario emerges. Data from the Food and Agriculture Organisation (FAO) shows that global food prices have stabilised considerably. In August 2022, FAO’s Food Price Index was at 137.6, in August 2023, it had fallen to 121.4. India’s wholesale price Food Index increased from 176 in August 2022 to 186 in August 2023. When global food prices fell 11%, they rose by 5.6% in India. The FAO’s Food Index and India’s wholesale price Food Index are not directly comparable but help us understand broad trends in food prices.
For those who prefer an analysis of consumer food inflation, the global median rate stands at 8.51%, way below India’s 9.94%.
Indian consumers also face high fuel prices. In March 2022, LPG prices in India were the highest in the world, petrol prices third-highest, and diesel prices eighth-highest when compared by purchasing power parity. Families coughed up high fuel prices at a time when global crude oil prices had fallen.
Since assuming power in 2014, the Bharatiya Janata Party government periodically raised excise rates on petrol and diesel and effectively abolished the LPG subsidy. At one point, excise rates on petrol and diesel had increased 250% and 800%, respectively. Political opposition forced the government to reduce the exploitative rates.
Excise has been a major contributor to the central exchequer. Since 2014, the government has collected nearly 22.6 lakh crore from excise duty. The petroleum sector has contributed 32.3 lakh crore in this period.
In September 2019, the government slashed corporate tax rates and estimated a revenue loss of Rs 1.45 lakh crore. It compensated for it by sharply raising excise on petrol and diesel during the pandemic. The excise collection increased from Rs 2.23 lakh crores in 2019-20 to Rs 3.72 lakh crores in 2021-22, an increase of Rs 1.49 lakh crores, more than sufficient to cover the massive tax break to corporations.
A century ago, Keynes wrote, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
In 2023, the Indian economy, with its high inflation and income inequality, has proven Keynes right. The high inflation is not the product of market forces alone but governmental interventions that prioritise one section over another. The process of inflation is ironically fuelled by taxing petrol and diesel. Instead of strengthening the welfare state, the tax proceeds have created wealth for a special class with massive tax benefits. While the poor of the country reduce their intake of basic nutrition and limit their mobility, the special class enjoy a jet set lifestyle. This is the real development model of the Modi government.
Akash Satyawali is a public policy professional and National Coordinator at the AICC Research Department.