UPA and its Inflation economics
- From: kerty9@xxxxxxxxx
- Date: Sun, 8 Jun 2008 10:36:31 -0700 (PDT)
UPA and its socialist politics of inflation, scarcities, black-
martkeing
Is it petrol or a petard record
By R. Balashankar
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 UPA’s 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imports can also be reduced or fully withdrawn.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 UPA’s 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 government—the Indo-US nuclear deal—is 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 India’s 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
Chidambaram’s 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 government’s 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.
.
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