Economist: Inflation hurting common man; why is Modi govt silent?

In a recent discussion on The Federal's Capital Beat, economist Santosh Mehrotra sheds light on the structural and seasonal factors contributing to the price surge. Criticising the government for its apparent inaction, he offered insights into the economic challenges at play.

What's driving inflation?

According to Mehrotra, the persistent inflation is primarily fuelled by food prices, which constitute nearly half of the CPI basket. He stressed that the government's decision to keep fuel prices high, despite falling international oil prices, exacerbates the situation. High excise duties on fuel are a significant contributor, as they inflate transportation costs, which in turn impact food prices.

Mehrotra also pointed to the reduction in fertiliser subsidies and erratic rainfall during the monsoon season as additional factors that have disrupted agricultural output and raised food prices. These issues, he argued, reflect deeper structural problems in the economy.

Also read: WPI inflation rises to 4-month high of 2.36% in Oct, food prices spike

Global and domestic context

Also, the strong US dollar and a depreciating rupee (now at ₹84 against the dollar) have compounded inflationary pressures. As India remains a major oil importer, the weaker rupee increases the cost of imports, further driving inflation. Mehrotra noted that while international oil prices provided a windfall gain for the government between 2014 and 2021, the benefits were not passed on to consumers.

Impact on jobs and consumer confidence

Mehrotra emphasised that inflation is being acutely felt due to stagnant real wages and a lack of job creation, particularly in the non-farm sector. Over the last four years, approximately 80 million workers have returned to agriculture, signalling a "catastrophic" situation in rural areas. With limited income growth and rising costs, rural households are barely managing to make ends meet.

In urban areas, even middle-class consumers are tightening their budgets. This slump in demand has resulted in low capacity utilisation in manufacturing, discouraging private sector investment. Mehrotra criticised the government for relying heavily on public infrastructure spending to drive growth while failing to boost consumer demand or address structural issues in the labour market.

Also read: Inflation leaves Indian middle class, and its buying capacity, shrinking

Policy suggestions and outlook

To combat inflation, Mehrotra suggested that the government reduce taxes on fuel, which would have a cascading effect on prices across sectors. However, he expressed skepticism about the government’s willingness to take this step, given its reliance on fuel taxes to fund welfare schemes and cash transfers, which he described as "handouts".

Mehrotra argued for a shift toward an industrial policy focused on job creation. “If you create non-farm jobs, incomes will rise, and with it, consumer confidence,” he said. He also pointed out the need for long-term investments in education and skills to address structural economic challenges.

Relief unlikely in short term

Also read: Inflation demands long-term vision and decisive action

As inflation continues to burden the common man, Mehrotra warned that relief is unlikely in the near term. He predicted that the government would prioritise fiscal consolidation and election-related expenditures over meaningful economic reforms. For now, the rising cost of essentials like vegetables, pulses, and fuel remains a pressing concern for households across the country.

While the government claims to be addressing inflation through welfare measures, critics argue that these steps fall short of addressing the root causes. With elections on the horizon, all eyes are on whether the Modi government will take decisive action to ease the financial strain on its citizens.