Pain from prices: More fuel tax cuts are needed to prevent inflation from hurting the recovery
Context: The latest inflation data, both retail and wholesale, point to accelerating price gains that could potentially undermine the fragile economic recovery by pushing up costs and depleting consumers’ purchasing power.
The November CPI inflation figures:
- November’s Consumer Price Index (CPI) shows year-on-year inflation at the retail level quickened to a three-month high of 4.91%, from 4.48% in October.
- Even when compared to last month: Last month’s CPI reveals prices are estimated to have risen 0.73% from October with as many as 10 of the 12 constituents of the food and beverages category witnessing month-on-month inflation.
- Food was in fact a major driver of the quickening in price gains on an annual basis.
- Vegetable prices surged from October, logging 7.4% month-on-month inflation.
- Little impact of reduction of tax on fuel: the Union government’s reduction in excise duty on petrol and diesel, which was followed by cuts in local value added taxes by many States, barely slowed the pace of inflation in the transport and communication category: the rate eased 88 basis points from 10.90% in October, to 10.02% in November.
- Clothing and footwear, housing, health, education and recreation were among the other key product and service categories that contributed to the sequential trend in price gains underlining the fact that inflation excluding food and fuel, otherwise known as core inflation, remains disconcertingly sticky and elevated at around 6%.
The November WPI Inflation figures:
- Wholesale price index racing to a record 14.2% in November, from October’s 12.5%.
- The fuel and power sub index surged 39.8% year-on-year, and all three major groups comprising the WPI posted sequential accelerations as well.
- Persistently high and climbing wholesale prices of basic metals, chemicals and chemical products, and textiles among manufactured products have the potential to feed through down-the-line to retail prices and add to inflationary pressure for consumers.
Continued worry:
- The tariff increases announced by telecom service providers last month are also expected to feed through into retail inflation in December.
- International semiconductor shortages and logistics bottlenecks are roiling the outlook for prices of electronics and other products reliant on global supply chains.
- With the rupee continuing to weaken against the U.S. dollar, policymakers also face the challenge of contending with imported inflation including the landed cost of crude oil shipments.
- While manufacturers in some sectors may opt to absorb rising input costs, at least in the short term till demand gets more entrenched, the signs including from automobile makers are far from reassuring.
Way Forward: The onus is clearly on the Centre to deepen the fuel tax cuts and address other supply-side issues to prevent inflation from hurting the recovery. Further, it is the responsibility of the RBI to keep the rates in check.
2. The NMP is hardly the panacea for growth in India; As the Government has also shown, there are out-of-the-box policy initiatives to revamp public sector businesses
Context: The National Monetisation Pipeline (NMP) envisages an aggregate monetisation potential of ₹ 6-lakh crore through the leasing of core assets of the Central government in sectors such as roads, railways, power, oil and gas pipelines, telecom, civil aviation, shipping ports and waterways, mining, food and public distribution, coal, housing and urban affairs, and stadiums and sports complexes, to name some sectors, over a four-year period (FY2022 to FY2025).
About asset monetization:
- Core objective – To unlock value: According to NITI Aayog, the strategic objective of the asset monetisation programme is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies.
- It advocates unlocking idle capital from non-strategic/underperforming government owned assets and reinvesting the funds, thus received, into new infrastructure projects and augmentation of assets such as greenfield infrastructure creation.
- This reportedly first-of-its-kind initiative claims that it will boost the economy, generate better employment opportunities, and drive the competitiveness of the Indian economy.
However, there is a need to investigate deeper:
- Need for reviewing reasons behind poor government asset quality: There is a need for policy makers to investigate the key reasons and processes which led to once profit-making public sector assets becoming inefficient and sick businesses.
- Recreating new asset may also lead to decline: Government is contemplating reinvesting the funds received to create fresh assets, post the NMP exercise. It is quite likely that the nation may find itself in a vicious cycle of creating new assets and then monetising the same when they become liabilities for the Government at a later stage.
- As India needs to invest about $1.5 trillion on infrastructure development in order to aspire to become $5 trillion economy by the year 2024-25, according to the Economic Survey 2019-20, public enterprises should be in focus.
About Government assets:
- Total assists: Going by the annual report (2020-2021) of the Department of Public Enterprises, Government of India, there are 256 operationally-run central public sector undertakings (CPSUs), employing about one million people; they posted a net profit of ₹93,294 crore (FY 2019-20).
- Classification: Out of these, 96 have been conferred the Ratna status – 72, 14, and 10 are Miniratnas, Navaratnas, and Maharatna companies, respectively.
Some reasons for PSU decline
- Cost overruns: In some cases, project completion time is exceeded, leading to elevated project cost so much so that either the project itself becomes unviable at the time of its launching or delays its break even point.
- Overcapitalization: Optimum input-output ratio is seldom observed in a majority of government infrastructural projects leading to their overcapitalisation.
- Reluctance to implement labour reforms,
- Poor decision-making,
- Ineffective governance and excessive government control are other reasons for the failure of public infrastructural assets.
- Lack of inter-ministerial/departmental coordination.
Addressing the Problem of poor coordination:
- Recently, the “Pradhan Mantri Gati Shakti National Master Plan” for multi-modal connectivity was launched with an aim ‘to synchronise the operations of different departments of 16 Ministries including railways and roadways for seamless planning and coordinated execution of infrastructure projects in a timely manner’.
- It is essentially a digital platform for information sharing among different Ministries and departments at the Union and State levels. It also entails analytical decision-making tools to disseminate project-related information and prioritise key infrastructure projects.
- Besides, it fosters a periodical review and monitoring of the progress of cross-sectorial infrastructure projects through the GIS platform in order to intervene if there is a need.
Essential steps highlighted by the Economic survey 2020-21
- Revamping the corporate governance structure in order to enhance operational autonomy augmented with strong governance practices including listing on stock exchange for greater transparency and accountability.
- The Department of Public Enterprises has reportedly initiated revamping of the performance monitoring system of central public sector enterprises to make them more transparent, objective and forward looking, based on sectoral indices/benchmarks.
- Government’s initiatives as part of the Atmanirbhar Abhiyaan (campaign for self-reliance) in order to boost domestic production in the steel sector, viz. inclusion of “speciality steel”, recommending four different types of steel for incentives under the production linked incentive (PLI) scheme;
- Selling steel to Micro, Small and Medium Enterprises (MSMEs), affiliated to Engineering Export Promotion Council of India at export parity price under the duty drawback scheme of the Directorate General of Foreign Trade (DGFT);
- Measures to provide preference to domestically produced iron and steel in government procurement, where aggregate estimate of iron and steel products exceeds ₹25 crore;
- Protecting industry from unfair trade through appropriate remedial measures including imposition of anti-dumping duty and countervailing duty on the products on which unfair trade practices were adopted by the other countries.
Conclusion : More such out-of-the-box policy initiatives are needed to rule out public asset monetisation schemes such as the NMP in future.
SOURCE: https://www.thehindu.com/
READ OTHER ARTICLES HERE: https://www.pmias.in/current-events/
