Low inflation is the key to ensuring fast, equitable economic development and welfare for all.
Control high inflation, bring down the cost of living and cost of production, reduce inequality and realise the dream of the nation to be the most advanced economy by 2047. High inflation kills the economy and people’s enthusiasm to live by honest means, tarnishes the image of policy-makers and administrators of the nation and shatters the dream of all aspiring to make India the most advanced economy in the world. Inflation in moderation not only helps economic growth but also enhances respect for values and ethics, happiness and brings in the desired welfare for all. This is evidenced in almost all advanced economies, viz., US, Australia, Japan, China, New Zealand and Canada. The analysis, based on data, is intentionally avoided here as the policy-makers, administrators and the well-off categories in society have a wealth of knowledge and information and they may definitely be aware of the ground realities among the vast majority of the people and their standard of life.
Inflation remains and continues to be the main enemy of the average people, the so-called common man in particular, as of today. They lose their sense of thinking, judgement, adjustment to sentiments, emotions and life surroundings and calculations without any end and, finally, to anything—to survive peacefully, comfortably and happily. Happiness linked to their earnings and survival is only for a few. For the majority of the people, fighting inflation throughout life makes living in misery and destined to destiny unfortunately man-made mostly.
High inflation also is a challenge to all policy-makers, politicians, administrators, sociologists and well-wishers of the welfare of the people anywhere and everywhere. Very high inflation is perhaps welcomed only by tax evaders, black money holders, anti-socialists and those bad elements who believe and survive by exploiting society by any and all means taking full advantage of complexity in taxes, laxity in governance and playing with the sentiments of different faiths diligently. This number is insignificant but is poisonous enough to spoil the food.
By theory, inflation means too much money chasing too few goods but, by practice, in an inflationary condition, what happens is that too few goods chase very few lucky people who have all the money and affordability and leave those who have no affordability in the lurch. Very high inflation takes away the very charm of life.
Smart politicians in power make merry by offering freebies at the cost of taxpayers and the establishments are compelled to tolerate all corrupt practices making the position of governance vulnerable. Unfortunately, a large segment of the population who respect values and ethics is caught in between as they cannot afford high prices to chase the goods and indulge in malpractice to survive the very high inflationary conditions by sacrificing a lot and missing out on a decent and dignified life. Not only can they not fight high inflation but they cannot think of surviving the high cost of living as food, shelter and clothing apart from health, travel, insurance, electricity, water, social life cost are unimaginably prohibitive.
Factors responsible for uncontrolled creeping inflation not susceptible to regulatory measures also cause an increase in the money supply and velocity of circulation of money, increase in currency circulation due to official money supply, black money, official build-up of forex reserves, inflows of foreign exchange official and unofficial, digital payments and increased rate of circulation of money, corruption and corrupt practices all around, increase in real estate transactions and attendant black money, and unaccounted and unnoticed illegal payments both in formal and informal economies in varieties of details not being captured apparently by any means anywhere.
Neither the government nor the Reserve Bank of India (RBI) can have a track of all these except some broad parameters in the absence of meaningful governance and data collection, data analysis and enlightened public and sensitivity of all concerned with administering the economy. India’s forex reserves almost doubled from US$382bn (billion) in June 2017 to US$704bn in September 2024—a performance par excellence by any reckoning, but has brought with it the inflation pressures is also a fact which cannot be ignored while fixing the inflation target.
Food inflation, which fortunately gets the better attention of the authorities, though it remains unbearably high for average people, also seems to be not properly assessed, to the shocking surprise of the people as the official claims on inflation control do not seem to be reflective of ground-level realities. Unethical pricing, under the guise of inflationary trends and the smartness of traders and vendors to exploit mercilessly to make fast bucks, also adds to the desperation of the people. Technically speaking, all unfair trade practices and very high prices should attract the provisions of the Consumer Protection Act, but the people left to themselves to survive cannot afford to waste money and time to fight unfair trade practices and high inflation in consumer court.
The goods and services tax (GST) came into effect in July 2017. The government of India introduced GST mainly to replace the multiple taxes and have a single tax system. GST, which replaced several indirect taxes, is a comprehensive, destination-based and multi-stage tax that is levied on every value addition.
In simple terms, GST is an indirect tax that is levied on the supply of all goods and services. It is one tax that is applicable all over India. (As per the GST Act) An invoice bill from a provision store indicates MRP, GST, CGST, SGST and IGST. For instance, in a bill of Rs797 for a total of eight items purchased on 2 October 2024, total taxable value is indicated as Rs740.15 and the taxes levied are indicated as Rs56.84 (CGST = Rs28.42 and SGST = Rs28.42). This means, for an essential provision of Rs740.15, GST alone comes to Rs56.84 which works out to 7.68%. This Rs740.15 is paid from the tax-paid pension income. If this can be used for quality food by a common man, the health, happiness and emotional quotient can definitely improve, bringing benefit to the nation’s economy.
GST no doubt is innovative for all its merits and is good and simple. But, in practice and realistically, it seems to be highly inflationary in its implementation and largely perceived as the ‘Government's Smart Tax’ to augment resources free of hassles. Although GST has been in operation since 2017, it has turned out to be inflationary and the cost of production and the overall cost of living has increased considerably. The GST collection, which amounted to Rs95,633 crore in September 2017 - though increased to Rs1.73 lakh crore in September 2024 (almost doubled), has perhaps benefited the government to contain the overall deficit.
The cascading effect of such an increase has to naturally reflect on the products and services impacting the ultimate consumers whose income levels cannot definitely have doubled and have to bear the brunt of GST. Thus, the inflation on food and non-food items and cost of living has increased, making the majority feel let down and the perception of the people that GST is inflationary in character is just and justifiable, calling for an in-depth examination of the rates and rationalisation of the rates to acceptable and convincing rates.
Willy-nilly, GST, instead of emerging as a benevolent, egalitarian, and equitable tax benefiting the people all around, has, in reality, turned out to be an inflationary, inequitable, cash-rich resource and widely undesirable/ unacceptable among the masses and consumers of very essential goods and services. Besides, as envisaged, this tax has not removed many other taxes directly and indirectly levied although some taxes are said to have been subsumed in GST.
As the proof of the pudding is said to be in the eating, the proof of all merits of GST is yet to be established with conviction and acceptability by the people and perhaps by the authorities as well as the inflation, since introduction of GST with high rates irrespective of mass consumable goods alongside all other major taxes in vogue, continues to be a big challenge despite a very accommodative and sensible monetary policy and unheard of success seen in the digital transactions possibly eliminating a big chunk of currency notes at retail levels in particular notwithstanding the fact that the pandemic COVID-19 has destabilised the measures.
The inconvenient truth in containing ground-level inflation faced by people in the lower and middle class is that the policymakers and the authorities conveniently forget at policy implementation that the fiscal policies and monetary policies have a cascading effect on the prices of mass consumption goods and they go beyond the capacity of many.
Food inflation, in particular, has crossed all limits of tolerance of the majority of the poor and a very large segment of the population at the lower end of the rung struggling to survive leave alone understanding the need to fortify the food, improve the health and enhance the quality of life. The result is visible in the poor health of the people without adequate nutritious food intake.
GST, with all its merits, has only added fuel to the fire and the quantum leap seen in digital transactions has only oiled the smooth flow of money and increased money circulation adding to not only inflation but also to the identification of black and white money. This is amply evidenced by the number of people filing income tax returns assessed at 81.8mn (million) out of 1.4bn (billion) people in the assessment year (AY) 2023-24 till 31 December 2023. This is claimed to be an improved status in the filing of returns. The ever-widening inequality seen in the country remains unexplained proof that tax compliance leaves ample scope for improvement.
While demoralisation of people takes place through high cost of living, the divinity is also seen side by side through motivation and very high-sounding promises and initiatives coming from all around enhancing aspirations of the people but with limitations for achievements. A maximum of 20% of the population may perhaps be able to enjoy the fruits of economic development whereas 80% of the population has to depend on food security, subsidies, freebies and other support systems.
Taxes devoid of inflationary impact are rare and other levies recognised and unrecognised at various points of services and sales also add to inflation which, by all means, seem to go unnoticed perhaps by policymakers and administrators who are associated with inflation control. The fact of the matter is that inflation estimated at 3.65% for August/ September and talked about by RBI as somewhat benign does not reflect the actual increase in prices of vegetables, fruits, and staple food items like wheat, rice, bread, roti, grains and oils. Even the prices of salt and mirchi are becoming prohibitive.
The day-to-day expenditure on only essential food items does not convince the people that inflation is under control and manageable. An increase in wages, salaries, or dearness allowances, etc, cannot be compensation at all to meet the real inflation at the ground level. On the contrary, it also adds to inflation as the demand from a segment of the people increases for the available commodities. The average person feels the pinch of inflation and swallows all make-believe statements emanating from all around. It is time the authorities reach these people, understand inflation and arrive at policies.
Apart from food inflation, the overall inflation and the cost of living have multiplied by leaps and bounds which go camouflaged from policy issues but adversely and very severely affect the cycle of savings, investment, employment, production, marketing, storage, distribution, transportation and consumption. Fiscal policies and monetary policies, if well-coordinated and implemented successfully and sensitively to each other's merits and demerits, can, to a great extent, help contain the overall cost of production and cost of living.
The full benefit to the public at large and the economy, in general, and the country, in particular can be envisaged and made a reality only if the legislative, administrative and judicial system work in very close tandem keeping the objective of making the economy most advanced by the year 2047. Time is short and the task is huge. Readiness is all that matters.
Welfare for all can be made possible only if food inflation is in moderation, fortified food is ensured to all, right to affordable education is guaranteed for everyone, laws of the country are respected and enforced equally for all without fear or favour and complied with by all citizens, effective governance and accountability in the whole nation turn into a reality and the fruits of economic developments and achievements are distributed fairly equitably and the entire humanity feels proud of being counted in letter and spirit and become part and parcel of the nations’ success all around.
Existence of poverty and unhappiness among a big chunk of the population and enjoyment of affluence by a very few cannot go well with an egalitarian society. Noble thoughts, noble words and noble actions need perfect coordination from all those who matter in developing the nation. It is very apt to quote here Mahatma Gandhi, father of our nation, that “economic equality means that everybody should have enough for his needs.”
High inflation cannot deny the rights of the people to lead a dignified and minimum standard life. Is it not time to relook into the food inflation and cost of living and relate them to various varieties of taxes by policy-makers in a very coordinated manner and make life comfortable for all segments of the population, and by understanding and rationalising all taxes, realise the dream of being an advanced economy by 2047?
Let us make it a people’s movement and see that the nation achieves it comfortably and enthusiastically.
(Dr TV Gopalakrishnan is retired chief general manager of Reserve Bank of India-RBI)
(eg a scooter or even the humble cycle to commute for work or trade) goods, the unavoidable medical expenses, the list is endless.
Man is creature of aspirations and in essence, the realisation of dreams and aspirations come with a cut to the taxman.
All Governments need taxes to fuel development. Such taxes are indeed a must. What should such taxes incorporate is rationality. Like the author says, GST is rapidly filling the Government's coffers, it's also fuelling inflation. A poor man having a few small denomination currency notes in his pocket must give the taxman his due, if he needs to sate his hunger with a small snack in even a very modest establishment.
The rationale of GST could definitely stand scrutiny and modifications and would give great relief to the really poor and needy, if it is moderated especially on the low hanging fruits.
Very well argued and articulated sir.
The write up covers comprehensively all relevant factors impacting real inflation in Indian economy. GST regime appears to have contributed substantially to retail inflation and therefore needs urgent attention of the GOI also. The RBI monetary policy Committee has a challenging task of finding an equilibrium point in arriving at the appropriate interest rate policy.
Lingaiah
Also the GST computation of purchase from provision store is incorrect. Taxable value = Rs. 740.15 Total GST = Rs. 56.84 (sub-divided as CGST & SGST of Rs. 28.42 each) Total bill = Rs. 797. The tax portion is 7.68%. Regards.
Thanks for this article which covers several aspects which are not usually covered in discussions about inflation and economic stability. After constitution of the Monetary Policy Committee 8 years ago, there is a perception in the public mind that "management of inflation" is in RBI's court. Reality is, as earlier, though interest rates can play a significant role in movement of prices, government expenditure, sources of funding of such expenditure or simply put, taxes and overall approach to budget are also decisive contributors in costs and prices.
While increased investment in infrastructure will improve employment situation, the reluctance to pool idle domestic resources for funding such expenditure and dependence on current revenue will have a direct impact on inflation. That's just one aspect. A comprehensive mapping of domestic resources for productive deployment is overdue.
The analysts who contributed articles on the subject in financial newspapers last week also didn't venture any strong guesses either way on interest rates and padded up their comments with observations on induction of new members to the Monetary Policy Committee.
Now it looks reasonable to assume that the reconstituted MPC may borrow time for touching base rates and may discuss broader global developments having impact on overall policy stance. Stakeholders will be more than happy, if this week's policy statement gives a signal about the direction of the movement of rates during the next couple of calendar quarters.
M G Warrier