Economy: Hanged in Between of Fill Up and Tape Up

The Backdrop of Holding Debt: Which Objective to Satisfy, A Never-Ending Trade-Off!

Have you ever tried to fill an empty bucket, with a hole underneath it? Any guesses on how long would it take to fill the bucket? Though it is a little goofy but a constant force of water supply shall prove to be futile, to keep the bucket full up to its rim. Similarly, the Indian economy is facing the trade-off between tape up and fill up. Creating a gigantic mismatch of fiscal decisions in the wake of the Apex Bank portrays a similar situation. Monetary policy and fiscal policy are those tools of the economy, which are like those of hands joined together, one without the support of the other will not be efficient to perform. We are in that era of time today, where the economy has to stabilize while taking into account a lot of factors acting like anchors and pulling it down.

One of the major anchors is the fiscal deficit, which is highly ballooned considering the expenditure on public health and financial needs against the backdrop of the COVID-19 while taking care of the needs of people for almost an entire year and tackling the crises to reduce the intensity of it being felt on the country and save it from a downfall. While, the economy is in great trouble, as after one year of sluggishness in growth, where the GDP slipped to 4.7% as recorded in the last quarter of 2020. It needs a strong come-back, but the fiscal deficit has surged due to the COVID-19 expenditure made to safeguard public health and give financial support to the economy. Growth is a necessity, as its increase will ensure the deficit to reduce as the tax base will increase simultaneously. Its main objectives this budget also has been to tape-up and fill-up. While the monetary policy is practising tape-up, the fiscal policy is busy filling up.

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Both policies at a time cannot achieve different objectives, monetary policy cannot practice the objective of growth and as well as target inflation without the support of fiscal policy and the government. Right now, the government is itself creating the inflationary risk for the economy, by increasing the excise duty on fuel, with already increasing fuel prices. It is putting pressure on the most important commodity on which the entire economy depends to exist. Inflation in fuel prices is consequently driving the inflation in the prices of other commodities as well, as transport costs for these commodities rise, the total fixed cost as a result increases, which makes these commodity prices vulnerable to hike.

While the monetary policy tries to target and lower inflation to spur growth in the economy, the fiscal policy is driving the inflation, to increase its revenue base for filling up the gap of the deficit. These opposite and desynchronized notions have led to a disconnect between the Apex Bank, government, and the effect of their policies on the economy. The Reserve Bank of India has been trying hard to keep a check on the inflation rate of the country. The Monetary Policy Committee (“MPC”) has kept the policy repo rates unchanged at 4% for four successive meets since August 2020. The rate was last changed to decrease by 40 basis points from 4.40% to 4.00% in May 2020. The role and action of RBI to keep inflation under control was undoubtedly commendable.

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The RBI and the Fiscal regulatory body ought to understand the essence of togetherness and more importantly complementarity while working for the same goal, which is to pull back the economy in a normal path and eliminate its sluggishness. These two protagonists of the economy have to enact a policy-oriented high-five to complement each other’s work. Despite the Apex Bank’s signals and efforts to curb the inflation rate, the prices of fuel (petroleum products and gas) have been abruptly increasing especially in the last 2 months. Fuel is the backbone of any economy, given its necessity in all other sectors.

Analysis of the Comparison in Taxes on Fuel Over the Year’s vs in that of 2021

Data reflects that the tax on petroleum products in India is 260% of its base price, which is unambiguously one of the highest across the globe. Here is a detailed breakup of the added value to the base price per barrel.

The data decipher that the Excise Duty rate in synchronization with VAT, for both petrol and diesel have been increasing. The Central Government’s share of the entire chunk is the excise duty levied, while VAT on base price goes to the state governments, reasoning out for varying prices of fuel in different states.

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The price of gas cylinders is made to exhibit a similar trend especially after December 2020. The cylinder price has been accentuating rigorously ending in a hike of 45% in the last 10 months. The cumulative price increase since December 2020 has landed for a hike of Rs. 175 per cylinder. With such exorbitant rises in the price of fuel, the target of inflation would just change from a dream to a nightmare. When the prices of fuel take an upshot, it leads to an increase in the transportation cost. Finished goods and raw materials, which ought to be transported face a higher cost which sums up the variable cost of accounting. Manufacturers, in an attempt to keep their profit rates fixed, would transfer this rise in cost to the consumers. And as we all know that a seller or producer of a commodity is a buyer of all other commodities. So, once he faces a higher price while purchasing a product, he would be eager to pump up the prices of his commodities, and this would spiral up to an average increase in the prices of the economy. An upward trend of prices for at least one quarter would lead to a hike in inflation rates.

Therefore, if the tax rates on the fuels are not rolled back, RBI’s attempt to control inflation would just resemble a distant dream of filling a bucket with a hole beneath it. The fiscal policy regulators should work hand in hand to complement RBI’s tremendous effort to curb inflation.


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