Interview: MPC's Ashima Goyal calls on states to cut fuel tax, oil firms to lower prices

According to Goyal, CPI inflation is unlikely come in above 7 percent again in August.

State governments and oil marketing companies (OMCs) should take necessary steps to help lower domestic fuel prices, Ashima Goyal, one of the three external members of the Monetary Policy Committee (MPC), has said.

"State governments that have not cut (tax on fuel) even once should definitely do so," Goyal told Moneycontrol in an interview following the release of the minutes of the August 8-10 MPC meeting on August 24. She added that oil companies "should not be awarded excess profits."

"We are in a market-determined system where they are supposed to transmit international oil price changes to the domestic market. This was suspended after the Ukraine war but has to eventually be resumed," she argued.

Also Read: MPC's Shashanka Bhide sees CPI inflation falling below 7% in August

Pump prices of petrol and diesel have not moved for more than a year in most parts of the country. Meanwhile, the average price of India's crude oil basket fell below $75 per barrel in June 2023 from $116 per barrel in the same month last year – although it has firmed up to $86 per barrel in August 2023 – allowing OMCs to generate huge profits.

While inflation for the 'fuel and light' category of the Consumer Price Index (CPI) was below 4 percent for the second month in a row in July, the index rose 1.8 percent month-on-month – the biggest sequential gain in a year.

When asked if the Centre needs to announce another round of fuel excise cuts, Goyal was circumspect, highlighting the government's need for resources to ensure food security, moderate food price spikes, and spend on infrastructure even as it reduced the fiscal deficit.

"Perhaps excise duty can be called a carbon tax and better aligned to create correct incentives," she suggested.

The Centre, in May 2022, had cut the excise duty on petrol and diesel by Rs 8 per litre and Rs 6 per litre, respectively. This came after it had cut the duties in November 2021 by Rs 5 for petrol and Rs 10 for diesel.

Excise duty collections are a key component of the Centre's revenue estimates. For 2023-24, the Centre expects to collect Rs 3.39 lakh crore, up from Rs 3.19 lakh crore in 2022-23. So far in the first three months of the current financial year, it had mopped up only Rs 51,813 crore – down 15 percent year-on-year.

Food price concerns

Meanwhile, the government is taking rapid action to contain the price of the other volatile component of CPI inflation – food. In July, retail food inflation more than doubled to 11.5 percent on the back of vegetable inflation shooting up to 37.3 percent – both being the highest since January 2020 – taking headline CPI inflation to a 15-month high of 7.44 percent.

According to Goyal, with tomato prices coming off their extreme highs and prices of other vegetables also softening, it is unlikely that headline retail inflation will be above 7 percent again in August, data for which will be released on September 12.

"But the real seasonal softening normally takes place in September," she added.

The RBI expects CPI inflation to average 6.2 percent in July-September before easing to 5.7 percent in October-December and 5.2 percent in January-March 2024.

Also Read: CPI inflation to average 'well above' 6% in July-September, says RBI Bulletin

The government's price control measures – ranging from the sale of tomatoes at discounted prices to the imposition of a 40 percent export duty on onions, among others – have also sparked protests by farmers.

"India has a long history of and experience in protecting both farmers and consumers through intervention in the food economy that can be used although there is much scope to reduce inefficiencies and distortions in the process," Goyal, the Emeritus Professor at Mumbai-based Indira Gandhi Institute of Development Research, said.

The sharp rise in inflation in July – with the data being released just days after the Reserve Bank of India (RBI) revised its own 2023-24 forecast upwards by 30 basis points (bps) to 5.4 percent – has led to concerns that inflation may end up averaging even higher. According to Goyal, as long as the current spike reverses, "the risk is only of a 0.1 percent or 0.2 percent (10-20 bps) increase that comes from higher inflation in one quarter."

As for core inflation, Goyal thinks it is "likely to continue to soften."

Core inflation printed at 4.9 percent in July, down from as high as 6.1 percent in February.

No growth hit yet

In its bid to bring down inflation, the MPC raised the policy repo rate by 250 bps to 6.5 percent in 2022-23. With GDP growth seen falling to 6.5 percent in 2023-24 from 7.2 percent last year, worries about the Indian economy slowing down sharply have been raised in certain quarters, which may require interest rate cuts. Goyal, though, sees things differently.

"Real rate is what matters for growth and this will go down with slightly higher inflation. The MPC has not so far raised real rates high enough to have major adverse impacts on growth," she said. The RBI's preferred measure of real interest rate currently stands at 1.3 percent.

Data set to be released on August 31 is expected to show growth increased rapidly in the first quarter of 2023-24 – pegged at 8 percent by the RBI – from 6.1 percent in January-March. However, the GDP growth rate is predicted to fall after that to 5.7 percent in January-March 2024 thanks to the waning of the favourable base effect. According to Goyal, a fall in the GDP growth rate after April-June "does not mean that growth momentum is reducing in subsequent quarters."

"Growth remains resilient for now, especially since investment is rising," she added.

With Goyal's term on the MPC entering its final year — she and her fellow external members, Shashanka Bhide and Jayanth Varma, started their four-year terms in October 2020 — she wants to end her tenure as a rate-setter with low inflation and high sustainable growth.

"In the early years of Indian inflation targeting, inflation was low partly because oil prices fell. It was unknown if targeting would work with the reverse. But flexible inflation targeting has delivered inflation largely within the tolerance band despite high oil prices and other unprecedented supply shocks while supporting a good growth recovery and financial stability," she said.