Economic Highlights
New Delhi,
21 June 2021
Food,
Fuel Inflation
PSU
STRENGTHENING VITAL
By
Shivaji Sarkar
The Indian economy may
have started recovering with the unlock but galloping inflation, increasing healthcare
expenses and rising unemployment are major banes.
The global economy is
to rise by 4 per cent and India would marginally benefit from it with some rise
in exports. A World Bank report wants India to create 90 million jobs in
non-agricultural organised sector, a herculean task as most private sector
offices are either closing down or slashing operations. Humanitarian crisis,
hunger deaths and societal conflicts are growing.
Latest figures
indicate 12.69 per cent inflation primarily on F2 – food and fuel. The fuel
price rise is hitting every sector of the economy with nobody to correct it. The
basic price of petrol remains still around Rs 35.99 and over Rs 65 are the Central
and State tax components. The edible oil prices have reached crisis points with
62 per cent spike, Union Food Secretary Sudhansu Pande says. This follows
withdrawal of edible oil from essential commodities list in September 2020
A State Bank of India
(SBI) report says that massive increase in healthcare,
especially in the hinterland, steadily rising fuel prices and online
delivery of articles will increase inflationary pressure much higher on the one
hand and crowd out other consumer spending on the other, putting a big question
mark on overall growth that's still being driven by consumption demand.
Month-on-month increase in inflation on non-institutional medicines, X-ray,
ECG, pathological and other clinical tests is taking a heavy toll not only in
urban areas but even on the rural populace.
The SBI report has
questioned the headline inflation figures announced by the Union Finance Ministry.
It says that a more important price concept is the relative prices, which are
not a monetary phenomenon but their movements convey important information
about the scarcity of particular goods and services “as now like health”. Health expenditure, which currently constitutes 5 per cent
of overall inflation basket, may jump to at least 11 per cent. It may be noted
that health expenditure is around Rs 6 lakh crore or 5 per cent of the private final
consumption expenditure (PFCE). This is likely to also result in squeeze in
expenditure on other items of discretionary consumption.
The daily
increase of fuel prices is another bane. “And if we look at credit card spends
since December, CPI computed inflation for the five month ending April is
higher than the CSO estimate on an average by 60 basis points and the higher
oil prices had forced consumers to ration out discretionary spends in
December”, says SBI Chief Economist Soumya Kanti Ghosh. It means the actual inflation
is 60 per cent more than the CSO figures.
The Reserve
Bank of India has virtually given credence to the SBI finding as it estimates
Rs 2 lakh crore losses on economic output. It cautiously says that it
may not reflect on GDP but there would be a considerable value loss across the
economy. The SBI report clarifies it as the share of non-discretionary spend
which has jumped to 59 per cent in April and 52 per cent and in March and “this
does not augur well”.
The
inflation is to further rise as the US has matched its interest rate rise. It
would impact India as well as there would be commodity price rise globally. The
RBI under government suggestion has suppressed interest rates but it will not
help keep prices low. It will make difficult for the RBI to manage the
conflicting targets of inflation, exchange rate and adequate liquidity amidst
weak growth.
The RBI
has already lowered its GDP projection to 9.5 per cent from 10.5 per cent. It
had hoped 18.5 per cent recovery in the first quarter, considered low base
given the contraction last year. Now it is skeptical due to the second wave of
lockdown, which sees decline in deposits, indicating higher household expenses
and lower savings. Additionally, currency holding i.e. cash with the people decelerated to 1.7 per cent
during April against a growth of 3.5 per cent last year.
It
substantiates what the SBI says that extra expenses on households have
increased manifold. Also, there has been
an increase in use of online delivery platforms which is not considered by the
NSO and if the NSO considers online prices, there will be 10-15 basic points’ (bps)
impact on CPI inflation. The SBI says that the online delivery adds to
inflation. The RBI says that the increased healthcare and other expenses have
impacted domestic demand. That is the reason of delayed recovery of
manufacturing, core sector and other activities.
The
recovery process, says the SBI, needs cut in fuel prices by tax
rationalisation, otherwise non-discretionary spends will continue to get
distorted and cause inflation. The RBI has given another formula. It has gone a
bit beyond and wants to partner with private sector – in short a prescription
for further denuding the PSUs. The recommendation should make the authorities
rethink on privatisiation.
Over the
last few years, major PSUs have consistently increased payouts to the
government despite a dip in their profitability. Since 2016, as per an official
diktat they are paying a minimum 30 per cent of their profit after tax or 5 per
cent of their net worth, whichever is higher, as dividend.
The 100
government companies declared a dividend of Rs 71857 dividend during 2018-19,
according to the CAG. In 2021, the PSUs
paid dividend of Rs 39,022 crore (against estimate of 34717 crore), the RBI
paid Rs 99,000 crore dividend and other banks Rs 1619 crore in 2020-21. In
short a major part of government expenses are being funded by the PSUs. The
government’s efforts to sell PSUs are being stonewalled by poor economy. It
should rather change its policies to strengthen the PSUs.
Despite
this the India remains an investment destination. Healthy flow of FDI into the
country corroborates India’s strength and attention of global investors,
industry chamber CII says. Total equity, re-invested earnings and capital rose
10 per cent to the highest ever $ 81.72 billion during 2020-21. The RBI expects
recent government boost in capital expenditure to spur activity and investment.
For all
this, however, there has to be a major shift in policy thrust. While private
investments must rise, the government must relook at strengthening PSUs to tide
over the crisis that is beyond the capacity of the private sector. This would
alone cut prices and boost demand. –INFA
(Copyright, India News &
Feature Alliance)
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