Inflation is not what used to be. Temporary tax cuts may be needed to tame it

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There is much more to inflation than onion tears. This is showing up in the government’s official price statistics. The wholesale price index (WPI)-based inflation has galloped to a 17-year high of 15.08 percent in April.

This is not a one-off. Nor is it because of a ‘base effect’, a statistical phenomenon that magnifies changes when compared with levels that were far lower. The price curve has been steadily rising since the last several months. WPI-based inflation, which is a kind of the Indian version of a producers’ price index, has stubbornly remained above the 10 percent since April 2021.

A plotted graph of India’s wholesale inflation since April 2021, when rate cantered across to double digits, does not make for a happy sight. It resembles a range of mountains that is seeking newer heights every month.

Ordinarily, when an economy is in a recovery mode, a higher inflation can, other things remaining the same, point towards greater demand. Rising income and greater spending power can prompt people to buy more, pushing up demand for goods and services. As supplies lag this boost in consumption, the prices of goods, including commodities, go up.

That, however, does not seem to be the case currently, where a mix of high input costs, falling supplies, and costly imports pummelled by a persistently falling rupee has meant that getting by has gotten significantly harder.

For example, the price of crude oil has seen a sharp increase over the past few months, mainly because of supply disruptions caused by the ongoing Russia-Ukraine war. This has had a cascading effect, not just on the price of tanking up cars, but also ferrying goods from one place to another. Higher transportation costs, eventually, have crawled their way in the form of costlier goods such as vegetables.

It’s not just soaring food or fuel prices that are hurting people’s pockets. Inflation is far deeper embedded than what the official price lines suggest. Soaring costs of several everyday services and non-essential products are bleeding household budgets.

A visit to a beauty parlour or a salon is more expensive now than, say, a year ago. Inflation expectations — or the view among consumers and businesses of where prices are heading — are above 10 percent, which implies that households expect the cost of living to get even higher.

According to the Reserve Bank of India (RBI)’s latest Inflation expectations, “expectations for both three months and one year ahead rose by 10 basis points each to 10.7 per cent and 10.8 per cent, respectively, as compared to January 2022 round,” the central bank’s Inflation Expectations Survey of Households said.

There’s also the problem of the rupee to reckon with. The currency has tumbled to a record low, and hurtling dangerously towards 80 to a US dollar. Currency markets, pretty much like most commodities, are largely governed by the laws of demand and supply. Stronger demand for a currency will push up its price and vice versa. The sliding rupee isn’t good news for students with plans to study and travel abroad. A weaker rupee implies they will end up paying more to buy dollars to pay for their fees. Likewise, an expensive greenback will make an overseas holiday costlier.

For Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das, a persistently weak rupee adds to an array of problems, graver than just mounting travel and college expenses. A slowdown in Europe, India’s biggest export market, could negate much of the exporters’ gains from a weak rupee as orders dry out.

A rationalisation of taxes in a host of manufactured products can help tame the inflation genie. This may burn a hole in the government’s revenue projections, but the taxes can be restored once the external factors including oil prices and the rupee stabilises in the coming months.

This will also help shift the terms of trade favouring farmers who have been paying a higher price for goods that they buy (say a garment) than the price they get for goods that they produce.

The causes of the tears have moved from onions to elsewhere. Inflation, thus, is not what it used to be. It is time for policymakers to take note of this.