There’s a perfect storm heading our way, warns Swaminathan Aiyar

The Indian middle-class will have to brace for a dent in their pockets caused by global fuel price rise, and further hammered by an expected soaring of edible oil prices.

“These are very tough times. It is not within the power of the central or state governments to solve this. This is a typhoon coming globally from outside. Secondly, it is not just oil. In the United States for instance, they have a record inflation of 8.5% but even if you strip out food and fuel, the other inflation is 6.5% against the norm of 2%,” Swaminathan Aiyar told ET Now.

Prime Minister Narendra Modi named states yesterday who had not reduced value added tax or VAT on petrol and diesel despite an excise duty cut by the Union Government, leading to swift reactions from other political parties.

Aiyar contends that oil prices will rise further if the Ukraine war continues.

He says consumers will have to live with higher prices even if the Centre and states stop blaming each other and sit down together and both take a hit on taxes. “I would say the prices right now are not by any means the peak. The global prices are some $105 per barrel. If the Ukraine war continues, I see the price of oil going up to $110, $115, $120, $130. So while there is a current problem, this problem is soon going to be overtaken by even worse problems. So at this point of time, how do you share the burden between the Centre and states? More and more is going to have to be borne in the next six or seven months, assuming that the war and sanctions continue,” said Aiyar.

A proposal by the oil ministry to cut duty on petrol and diesel reportedly did not find favour with the finance ministry.

Central excise duty and the value-added tax imposed by states make up a big share of the retail price. In Delhi, taxes account for 42% of the petrol’s retail price and 37% of diesel’s rate.

Excise duty has risen sharply in eight years – from Rs 9.48 a litre in April 2014 to Rs 27.9 on petrol. Duty on diesel has risen from Rs 3.18 a litre to Rs 21.8. The central excise collection from petrol and diesel increased from Rs 1.78 lakh crore in FY20 to Rs 3.72 lakh crore in FY21.

Oil prices began falling in the middle of 2014, staying low for most of the last eight years. The Centre raised duties to mop up gains from the price decline. The sharp price rise of the past few months, coupled with high taxes, is beginning to bite consumers and hurt the economy.

For the middle-class consumer to get relief, the Union and State governments have to stop blaming each other, said Aiyar.

“All I can say is that in politics, every party likes to put the blame on the other side. At this point of time, both sides actually need to do something instead of just pointing the finger at each other. The Centre needs to cut duties modestly and not too much. The state governments need to do something similar and at the end of it all, we will still have to live with higher prices. Let us not pretend that there is something happening which is entirely the fault of either Mr Modi or the states,” said Aiyar.

An analysis by Business Standard newspaper showed that in absolute terms, it is indeed a non-BJP state, Maharashtra, that garners the most from the sale of petroleum products. But BJP-ruled Uttar Pradesh has the second highest collection.

The move by the world’s biggest palm oil producer to ban exports from Thursday will increase prices of all major edible oils including palm oil, soyoil, sunflower oil and rapeseed oil, industry watchers predict. That will place extra strain on cost-sensitive consumers in Asia and Africa hit by higher fuel and food prices.

Indonesia‘s decision affects not only palm oil availability, but vegetable oils worldwide,” James Fry, chairman of commodities consultancy LMC International, told Reuters.

Aiyar says even if you strip out food and fuel inflation, the balance is so high which makes it imperative for countries to raise interest rates substantially in the next 12 months. “The question is should the Reserve Bank follow suit or within the Indian context can we afford to worry more about growth than prices? The truth is that we on our own are not going to be able to control prices.”

“I think the RBI is right to say that raising interest rates very high will squeeze production without solving the problem of imported inflation.”

Aiyar expects the Centre to continue with the free food programme and go for some cuts in oil and excise duties for cushion. “I fear that this inflation is going to be with us for quite some time even if Covid does not reappear, even if the Ukraine war comes to a reasonable end. I do not think we are going to be free of inflation.

This article was originally published in Economic Times on April 28, 2022.

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