Inflationary surge is a global phenomenon today, but Modi’s India has done much better than others

Today’s inflationary surge is global in nature and is being felt by most advanced economies (AEs), emerging markets and developing economies (EMDEs). During the last two years, most Central banks followed easy money policies, and most governments announced massive stimulus packages to repair the ravages unleashed by a debilitating pandemic in the form of Covid-19. In 15 of the 34 countries classified as AEs by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was running above 5 per cent.

The year 2022 has only seen the inflationary tide rising further, globally. While other countries have been reeling from pandemic-induced inflation, India has been keeping inflation largely under control. To put things in perspective, one must note that wheat prices hit a high of $13 per bushel from $5 a bushel in the last two years, a massive 160 per cent jump. Corn prices globally rose by a steep 45 per cent year on year (YoY) in 2021 and have risen by another 37 per cent in the first four months of 2022. Soyabean prices rose from $9 to over $17 per unit in the last 18 months, a whopping 89 per cent jump.

Inflation in the US continued to surge to a massive 8.5 per cent in March 2022, after an equally steep rise of 7.9 per cent and 7.5 per cent in February and January 2022 respectively. That is the biggest year-on-year leap since 1982. Fuel inflation in the US rose by a whopping 32 per cent year on year (YoY) in March 2022, while food inflation went up by 8.8 per cent YoY, in March. The price of beef rose 16 per cent, flour by 14.2 per cent, citrus fruits by 19.5 per cent, and milk by 13.3 per cent in March 2022 in the US.

Annual inflation rate in Europe rose to a record high of 5.8 per cent in February, up from 5.1 per cent in January. The UK’s annual inflation rate rose in March 2022 to a steep 7 per cent, up from 5.4 per cent in January 2022, the highest level since March 1992. The Netherlands with inflation of 9.7 per cent and Spain with inflation at 9.8 per cent have seen the highest inflation print in over 45 years. In Canada, property prices have hit their highest in decades, rising by over 50 per cent in the last two years, due to which the Canadian government has banned outsiders from purchasing property. Inflation as measured by the producer price index (PPI) increased 8.3 per cent year-on-year in March 2022, after an equally steep rise of 8.8 per cent in February 2022, in China.

At least 78 out of 109 EMDEs are today confronting annual inflation rates well above 5 per cent.

In India, in contrast, the Modi government has fared much better and has indeed done a very commendable job in containing inflation. While retail inflation was 5.66 per cent, 6.01 per cent, 6.07 per cent and 6.95 per cent in December 2021, January 2022, February 2022 and March 2022 respectively, one should not forget that for the better part of 2021, inflation was below 5 per cent. For example, in September, October and November 2021, retail inflation in India as measured by the consumer price index (CPI) was reined in at 4.35 per cent, 4.48 per cent and 4.91 per cent. More importantly, food inflation in these months was minuscule at 0.68 per cent, 0.85 per cent and 1.87 per cent. One must not forget that food inflation as measured by the FAO food price index (FFPI), hit its highest level globally in 2021, the highest ever since 1970. But India has reined in food inflation pretty well, relatively speaking.

Why has global food inflation hit multi-decade highs? Droughts, floods, inclement weather in large parts of the world's food bowls and in Central America, Latin America and some major oilseed producing countries are the reason for soaring food prices. For example, Ukraine, Argentina, China and Russia, the largest sunflower oil-producing nations, faced inclement weather in the last two years. Ditto was the case with Kazakhstan, Mexico and Canada, among the big safflower oil-producing nations. As for palm oil, over 84 per cent is produced by Indonesia and Malaysia combined and besides bad weather which hampered production, both these countries imposed many export restrictions during Covid, further distorting the demand-supply dynamics for palm oil-importing countries like India.

Representational image. AFP

Things in Indonesia are so bad that police have been deployed for 24-hour surveillance of cooking oil production and distribution as rising food prices become a key political issue in the country. The Indonesian police task force, intelligence agents and government employees are making sure companies are producing bulk cooking oil as targeted and selling it for below the 14,000 rupiah (98 cents) a litre price cap. The less said about Sri Lanka's traumatising economic crisis, the better. Fuel stations have run dry and even posh neighbourhoods have no electricity for almost 18 hours a day, with rural hinterland suffering from 24-hour power cuts. There is no diesel to run diesel gensets either.

A few months back, the United Kingdom faced a situation where its gas stations ran almost dry. Whichever way one looks at it, India under Prime Minister Narendra Modi has managed the economy very well, sidestepping geopolitical upheavals and violent price gyrations in the fuel and food economy that many other countries have been grappling with unsuccessfully.

In fact, India is even being the good Samaritan and has agreed to extend a $1 billion credit line to Sri Lanka, so that it can procure essential items, food and medicines. In February this year, India provided $500 million via a loan facility to Sri Lanka for procuring petroleum products and tackling its energy crisis. Sri Lanka has forex reserves of barely $2 billion whereas India with over $600 billion, has the 4th largest forex reserves globally, after China, Japan and Switzerland. Hence for ignoramuses to compare India with Sri Lanka is plain hogwash.

Coming back to inflation, it is pertinent to ask which two places in India have the highest fuel price? Well, it is Parbhani in Maharashtra, where in early April, petrol cost Rs 121.38 per litre and diesel, Rs 103.97 per litre. In Sriganganagar in Rajasthan, petrol shot up to Rs 120.73 and diesel Rs 103.30 per litre. In both the aforesaid states, the Congress is in power, either directly or via an alliance. In Congress-ruled states, the average petrol price is higher by Rs 18-21 per litre, compared to many BJP-governed states. The reason for this difference is nothing but pure greed on the part of Congress regimes, whereby they refuse to cut VAT on petrol and diesel. So while Rahul Gandhi and his sundry bunch of protesters are crying wolf over rising fuel prices in India, the harsh truth is that Congress-ruled states are milking their taxpayers dry by refusing to cut VAT in any meaningful measure. So much for Rahul Gandhi's hypocrisy!

Representational image. AFP

Weather-related reasons apart, the pandemic-induced sharp bust-and-recovery patterns produced unpredictable and prolonged supply-side disruptions, leading to supply-side deficits, which in turn led to cost-push inflation. True, as the pandemic receded, demand saw a resurgence but more than “demand pull”, it was “cost push” inflation that wreaked havoc globally. That Central bankers kept buying bonds indiscriminately and governments kept pumping money into their economies to “pump prime” and resurrect them, only led to more speculative money finding its way into just about everything — gold, oil, bonds, commodities, Wheat Futures, Corn Futures, etc. Inflationary pressures globally, among other things, have been driven also by overheating in the aftermath of significant policy stimulus. Here again, the Modi government’s cautiously calibrated approach at infusing stimulus at the height of the Covid wave has been very effective. In sharp contrast, some of the AEs, the US included, unleashed gigantic fiscal stimulus packages, which were not focused and eventually ended up creating asset bubbles and soaring inflation, with very little attendant benefits.

Another major issue affecting advanced and developing economies alike is global supply chains, which continue to be severely affected by the events of the past two years. Transport costs have skyrocketed. And unlike the oil-based supply shock of the 1970s, the Covid-19 supply shocks are more diverse and opaque, and therefore more uncertain, as the World Bank’s most recent report suggests.

In EMDEs, currency depreciation (owing to lower inflows of foreign capital and downgrades of sovereign credit ratings) has contributed to inflation among imported goods. And because inflation expectations in EMDEs are less anchored and more attuned to currency movements than in AEs, the pass-through from exchange rates to prices, tends to be faster and more pronounced. But again on this count, the Modi government has done a stellar job. Brokerage firm ICICI Direct said that unlike 2013 when the rupee depreciated drastically after the US Fed announced monetary tightening, India currently holds the fourth largest forex reserves globally, at over $600 billion and also has a surplus BOP.

In the light of abundant foreign exchange reserves and the strong performance of rupee vis-à-vis its global peers, rupee’s depreciation beyond Rs 78 per US dollar in the calendar year 2022 is highly unlikely. The rupee in the first week of April 2022 has been pretty steady in a range of Rs 75-76 to the dollar. The rupee is likely to face resistance near 78 levels and strengthen back to 72 levels in the coming months, as India seems to be in a better position to withstand any major shock from monetary tightening. India’s forex reserves are equal to about 12-14 months of import cover. Given that the rupee has enough cushion to withstand external shocks and is unlikely to breach the 78 to a dollar level anytime soon, imported inflation on account of a depreciating rupee has been kept in check and here again, the Modi government deserves kudos for the excellent handling of India's external economy.

India’s current account balance recorded a deficit of $9.6 billion in the July-September 2021 quarter, as against a surplus of $6.6 billion in the April-June 2021 quarter, but the deficit was mainly due to the widening of the trade deficit, with economic recovery kicking in. A major achievement of the Modi government, undoubtedly, has been reining in the current account deficit (CAD). It is a well-known fact that a higher CAD leads to imported inflation, something the Modi government has assiduously avoided. In FY18, FY19 and FY20, India's CAD was 1.8 per cent, 2.1 per cent and 0.9 per cent of GDP respectively.

US dollars. Image courtesy News18

In FY21, India reported a current account surplus (CAS) for the first time in over 17 years. For a fast-paced economy like India, a CAD of 2.5-3 per cent of GDP is not a problem, ideally speaking. However, one needs to be reminded that in FY13, under the UPA government, India's CAD had snowballed into a dangerously precarious level of 6.8 per cent of GDP, completely destroying India's external economy and setting the stage for high inflation. Hence the Congress has no business lecturing the Modi government on handling inflation or related matters.

The balance of payment (BOP) has remained in surplus on strong FDI inflows and narrower current account balance in the last few quarters. In FY23, even if the trade deficit widens as the economy reopens, strong inflows will keep the current account deficit in check. A fact worth mentioning here is that in 2021, the rupee depreciated only 1.8 per cent against the dollar, outperforming its global peers such as Japan’s yen, South Korean won, South African rand and EU’s euro which depreciated by a far higher level of 11.5 per cent, 9.7 per cent, 8.5 percent and 7.9 per cent respectively. More the depreciation, more the chances of importing inflation. In fact, it is because the Modi government has managed the current account balance very effectively, that the rupee has not seen any untoward volatility, which in turn has helped India in reining in imported inflation, despite India being a net oil importer and a net commodities’ importer.

A rise in risk appetite in the global markets helped the rupee perform better than its peers. Inflation which largely remained under RBI’s comfort zone in the last year, helped the Central bank to maintain lower borrowing costs to support the economic recovery and this also contributed to rupee’s steady performance.

Food accounts for a much larger share of the average household consumption basket in EMDEs, which means that inflation in those economies is likely to prove persistent. Today’s higher energy prices will translate directly into higher food prices tomorrow (through higher costs for fertilizer, transport, and so forth). Food inflation is the most regressive form of taxation as it burdens the poorest the most. And it is here that the Modi government reached out to the last mile standing via the PM Garib Kalyan scheme.

In the absence of global policy options to resolve supply-chain disruptions, the task of addressing inflation is largely left to the major Central banks. While the US is poised to undergo a modest tightening (by historical standards) in 2022, this is unlikely to be sufficient to rein in inflation. The US Federal Reserve’s tendency to do too little, too late is well known. The US and other advanced economies failed to tackle inflation quickly during the 1970s and they ultimately needed far more draconian policies, which led to America’s second-deepest post-war recession, along with a debt crisis.

As the old saying goes, “A stitch in time saves nine.” So while the US and large parts of the developed world are likely to grapple with hyperinflation or stagflation, which could further deteriorate into a recession going forward, the timely moves by the Modi government to give over Rs 2 lakh crore worth of cash to farmers via PM-Kisan or say free food and free ration to the needy, collateral free loans to MSMEs via the ECLGS scheme and liquidity support to the contact sensitive sectors, have all worked wonders.

External geopolitical factors such as the Russia-Ukraine war and the resultant supply chain disruptions have led to an increase in the prices of several essential items such as energy, food and metals. There are those that argue that since India imports a fraction of its oil from Russia, the ongoing crisis there should not have an impact on Indian fuel prices. These people miss the fact that the effect is felt on the Indian basket of crude oil, which has a direct impact on the price at which India buys oil. The price of oil available for import by India increased from about $73.3 a barrel in December 2021 to over $110 a barrel in the first week of April 2022. In March 2022, the Indian energy basket recorded its highest price at $128.24 per barrel, while Brent Crude went ballistic, beyond $130 per barrel for the first time since 2008, the highest in 14 years.

Representational image. AP

India imports over 83 per cent of its oil requirement. In addition, since fuel prices are relatively unregulated in India, this means external events can have a significant impact on domestic fuel prices. However, despite this, prices of petrol and diesel have not changed since 2 December 2021, for 137 days in a row. LPG prices have not changed since 6 October 2021 or 167 days. The current hikes in petrol and diesel prices come against this background. The hikes in petrol and diesel in India by 5-10 per cent are minuscule compared to the massive rise of anywhere between 52-58 per cent in other countries in the last few months. In the US, petrol costs an average of $4.637 per gallon, which is nearly 20 per cent higher than the price just a month ago. In the UK, petrol prices have consistently been hitting all-time highs over the last month, with the latest price at 1.79 pounds a litre. This is over 20 per cent higher than it was a month ago. In Germany, the price of Petrol has increased by 15 per cent over the last one month alone.

Retail food inflation (CFPI), which affects the common man the most, has remained benign in India through most of the year and slightly increased recently to 5.85 per cent in February 2022 and 6.95 per cent in March 2022, due to external factors. Average inflation for the period April-March 2021-22 stood at 5.85 per cent as against 6.22 per cent in the corresponding period previous year, as in the pandemic year. In the monetary policy announced on 8 April 2022, the RBI raised its inflation projection for FY23 from 4.5 per cent to 5.7 per cent, primarily on account of the phenomenal rise in global crude oil prices. One needs to remember that 5.7 per cent is still lower than RBI’s upper band of 6 per cent.

RBI maintained an accommodative stance, keeping the Repo rate at 4 per cent for the 11th time in a row, in the monetary policy announced on 8 April 2022. While the US Fed raised interest rates by 25bps on 16 March 2022, RBI's decision to not raise Repo rate once again showcases how the Modi government is pro-middle class. Of course, with the 10-year benchmark yield hitting 7 per cent on 8 April, at some point this year RBI will have to raise the Repo rate to curtail inflationary expectations. But since calibration has been the essence of RBI’s policy, rather than lumpy hikes, any rate hike will also likely be a calibrated one, which is absolutely the right way to do it.

Since the Modi government took charge in 2014, inflation has remained under control. Retail inflation crossed the 6 per cent mark only eight times between May 2014 and March 2020, when the nation-wide lockdown was announced to protect the nation from COVID-19. Post-pandemic, the rate of CPI inflation crossed the 6 per cent mark only rarely and that too only in response to external, largely uncontrollable factors. To set some context, it is important to note that the country experienced the worst era of inflation from 2010 to 2014 under the Congress-led UPA.

Under the UPA, retail inflation was more than 9 per cent in 22 of the 28 months from January 2012 to April 2014. During this time, inflation even crossed into double-digits, nine times. This was largely due to irresponsible fiscal policies, crony capitalism, and policy paralysis. Fuel inflation is a complex issue due to the linkages with global oil prices. However, the Modi government has been forthcoming and transparent in its pricing policies, accounting standards and also in how it is using its cess collections for the benefit of the nation as a whole. No one should forget that the Congress left unserviced oil bonds of over Rs 1.5 lakh crore, which are being serviced by the Modi government. The Congress earned political mileage by burdening future generations via these oil bonds.

Under UPA retail inflation was over 9 per cent for most of the period between January 2012 to April 2014. Reuters

On 3 November 2021, the Central government cut the excise duty on petrol and diesel by Rs 5 per litre and Rs 10 per litre, respectively. The entire cut in price was on cesses, so there was no impact on revenues of states. After the Centre slashed excise duty on petrol and diesel, all BJP-ruled states also cut value-added tax (VAT) on fuel by anywhere between 13 per cent and 21 per cent. However, so far six Opposition-ruled states have not reduced their taxes on fuel by even a single penny. These states are Andhra Pradesh, Kerala, Maharashtra, Tamil Nadu, Telangana, and West Bengal. Jharkhand reduced prices for certain segments, not for all. Chhattisgarh reduced VAT by a token 1 per cent and Rajasthan by a measly 4 per cent, while Delhi reduced VAT on petrol but not on diesel. It is nothing but rabid hypocrisy on the part of Opposition-ruled States to expect the Centre to keep cutting excise duties, while these Opposition leaders are themselves refusing to cut VAT in their own states by even a single penny!

Speaking of edible oils, to provide relief to consumers, the Modi government reduced customs duty on crude palm oil from 35.75 per cent to 8.25 per cent. On sunflower and soybean oil, the Customs duty was reduced from 38.5 per cent to 5.5 per cent. These duty reductions provide relief in excess of Rs 20,000 crore.

Customs duty on Masoor was reduced from 30 per cent to 10 per cent, giving a yearly relief of Rs 1,000 crore, while Customs duty on steel was rationalised significantly. Further, Customs duty was exempted on iron and steel scrap, while Customs duty was also rationalised on copper scrap. In addition, anti-dumping duties were revoked on various kinds of steel. This provided significant relief to the metal industry. In textiles, Customs duty on key raw materials like Caprolactam, Nylon Chips and Nylon Yarn were rationalised. Anti-dumping duty was revoked on key raw materials like viscose fibre, PTA, other fibres and Yarn, to make available these raw materials to the industry, at a reasonable cost. As Covid relief measures, significant exemptions from Customs and GST were provided to medicine and medical equipment like oxygen concentrators and ventilators.

Over the course of 2020 and 2021, approximately 38 lakh MT of free food grains were provided every month to 81 crore beneficiaries under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). This year as well, the government will be providing free food grains till September 2022. Under GST, the weighted average rate has come down to 11.6 per cent, according to the RBI, as compared to the revenue neutral rate (RNR), as recommended by the RNR Committee, of 15.3 per cent.

According to former finance minister P Chidambaram, the Modi government has earned Rs 26.5 lakh crore from fuel tax collections between 2014 and 2021. He adds that the total outgo on free food grain, cash allowances to women, PM-Kisan and other cash transfers is “no more than Rs 2.25 lakh crore — which is less than the annual fuel taxes collected by the Centre alone”. These numbers posed by the former finance minister are nothing but a vicious bunch of lies. The outlay on PMGKAY alone is Rs 3.4 lakh crore while under PM-Kisan, over Rs 2 lakh crore has already been given to over 10 crore farmers. One is not even counting the subsidised gas cylinders given under PM Ujjwala Yojana or close to Rs 1 lakh crore that is being spent on giving free Covid vaccines to those who can't afford it, or the huge amount of money being spent to give free health insurance under Ayushman Bharat to the marginalised sections of the society.

According to the RBI, the total developmental expenditure by the Central government during the period 2014-22 was a whopping Rs 90,89,233 crore. This included more than Rs 26 lakh crore in the form of capital expenditure to modernise infrastructure and create productive assets, Rs 25 lakh crore for food, fertilizer and fuel subsidies, and Rs 10 lakh crore on social services such as health, education, affordable housing, etc.

It is clear that the collections from the fuel tax have been put to good use as development expenditure by the Modi government. It is unfortunate that a former finance minister (Chidambaram) would miss out on these basic data points either due to sheer oversight or deliberate ignorance. Either way, it exposes the Congress and its falsehoods. The hard truth is, as compared to Rs 90.9 lakh crore spent on development expenditure by the Modi government in the last eight years, the previous Congress dispensation spent only Rs 49.2 lakh crore over a 10-year period between 2004 and 2014.

So to cut a long story short, while the erstwhile Congress regime behaved like the reckless, prodigal son and did not even bother to regret or repent for its recklessness, the BJP government has repaired and reinvigorated the Indian economy, with Prime Minister Modi taking the bold lead in combining the best of both — welfarism and unrelenting reforms.

The author is an economist, national spokesperson of the BJP, and the bestselling author of ‘The Modi Gambit’. Views expressed are personal.

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