“Bahut huyi mehengayi ki maar, abki baar Modi sarkar” (Enough of price rise, this time, it will be Modi sarkar).
This was the resounding campaign slogan of the BJP before it stormed to power in 2014. The party had successfully managed to portray higher prices under the previous UPA government as yet another instance of bad governance and had instead promised Indians a regime where inflation would be kept under a tight leash.
And for the first five years of its reign at the Centre, the Modi government did fulfil this promise, aided by benign oil prices and abundant production of foodgrain. But ever since the same government has returned to power, inflation has been raising its ugly head. In December, retail inflation has been the highest in all of the Modi era, with prices of vegetables (onions), pulses, fish, and meat rising significantly.
The consumer price inflation index (CPI) inflation number for December stood at 7.35 per cent, the highest since July 2014 when it was 7.39 per cent. This spike in CPI inflation has been led by three vegetables: ginger, potato and onion. An analysis by the State Bank of India says excluding these three vegetables, headline inflation has actually declined to 4.48%. Also, at 7.35%, the inflation print has breached the upper limit set by the RBI.
So the question now on everyone’s minds is, since the Modi government was able to successfully control price rise in the first five years, why has it failed to showcase its spectacular managerial skills in the second innings? An economist had pointed out earlier that the Modi government had come to power in 2014 at a time when low oil prices and abundant rains helped it control inflation and that adverse oil prices and drought had played havoc under the previous UPA regime.
In an article by The Hindu Business Line, where comparisons between the UPA government’s second term and the Modi government’s first term were done on economic parameters, Madan Sabnavis, Chief Economist of CARE Ratings, had shown that on several parameters like GDP growth rate, fiscal deficit, current account deficit and inflation, Modi 1.0 was better than UPA 2.0.
What hampered the good work seen in the first term of this government could be a mix of external factors such as global price hikes and also the eruption of social issues, which has kept the government occupied. Or too distracted to deal effectively with a flailing economy.
It wouldn’t be incorrect to say that in recent weeks, social agenda has overtaken the economic agenda as the country is embroiled in unrest over the new citizenship law and the government spends inordinate time and resources in dealing with the fallout of this unrest.
Anyhow, in the current episode of rising inflation, food has accounted for 75 per cent of headline inflation in December although its weight in the CPI basket is just 46 per cent. And since the beginning of 2019, the drivers of food inflation have been coarse cereals and pulses.
“Vegetables joined the party in March and vegetable inflation since then has been in double digits. Vegetable inflation became more acute due to the abrupt rise in the prices of onion and tomato lately. Although the low base has also played its part in pushing the vegetable inflation to 69.7 per cent in December 2019, vegetables’ prices have remained higher this winter than last winter,” said Sunil Sinha, Principal Economist at India Ratings and Research.
What the government has done (or not done) to bring down the retail prices of onions, specifically, showcases its folly. Another prominent economist pointed out that the government has had access to enough foreign exchange and it even chose to use these resources to control the price level of onions through imports. “But obviously all this was not done early enough to prevent the sharp spike in prices.”
At one point in December, a kg of onion was priced at ₹200 in some markets. The economist said the government has been unable to handle the situation where onion prices kept rising; it has been unable to prevent hoarding and even diversion of supplies, which lead to a further price increase. And the decision to cool prices through imports was taken too late.
हमारी मांग है कि प्रधानमंत्री फौरन विपक्षी दलों की बैठक बुलाएं। पूरे देश को विश्वास में लेकर अगले 15-30 दिन में महंगाई कम करने का रोडमैप बताएं।
मोदीजी मौन रहकर देश की जनता को महंगाई, बेरोजगारी, विभाजन की आग में झोंककर अपनी जिम्मेदारी से भाग नहीं सकते: @rssurjewala
— Congress (@INCIndia) January 14, 2020
The Congress has already criticised the runway inflation, demanding a roadmap from the government to reduce prices while also accusing the BJP of increasing its own income.
Meanwhile, the SBI analysts have said they now fear a “protein inflation” as people tend to shift to pulses, eggs and meat when vegetable prices rise and this could lead to an increase in the prices of these products. This, in turn, could keep inflation on the boil for long. In any case, the analysts are predicting that inflation will hover near the 7% mark for the remaining two months of the fiscal.
It is pertinent to mention here that for much of this fiscal, the RBI has been bearing a disproportionate burden of keeping the economy kicking. It has lowered lending rates five times in a row. In the December policy, the central bank finally paused, citing rising inflation. As the inflation print has only worsened, there is little hope of the RBI cutting rates any further just yet.
This leaves the onus of any corrective steps to boost the economy on Finance Minister Nirmala Sitharaman, who is slated to present the Budget on February one. What tools does Sitharaman have at her disposal to reign in inflation remains to be seen; there is anyway little scope of any government action helping with overall economic growth.
“Considering the higher than targeted level of inflation and the fiscal challenges with regard to the Government surpassing its fiscal deficit target, the RBI is likely to maintain its status quo on the policy rates in the forthcoming policy meeting. Going ahead, RBI’s monetary policy would remain contingent on the inflation trajectory and the government’s fiscal stance,” Sushant Hede at CARE Ratings said.