Where Are We?

Roots Of The Crisis… 

“Inflation” a monetary phenomenon about which every economy in the world worries about, Aftermath of covid there has been a upward surge in the inflation all over the world due to raise in the aggregate demand and in many economies the Inflation has crossed the upper band limit of the inflation range and its been a challenge to the policy makers and economists all over the world to bring back the inflation to normal levels. Though many countries have changed their monetary policies to decrease the inflation in their economy they never got succeeded in achieving that due to external factors of the respective economy. Generally Inflation is broadly divided into types one is demand pull inflation and the other is cost pull inflation and the main reasons behind the demand pull inflation is the change in aggregate demand in the economy and the main reason behind the cost push inflation is the raise in the cost of production due to raise in prices of raw materials and other factors of production. Similarly there are many mechanisms used by the central banks used to control these inflation like changing the repo rates, cutting the corporate taxes , relaxing the income taxes and so on.

Currently many economies in the world are going through a crisis due to the Inflation. The prices of the commodities are rising all over the world, everything is becoming expensive and they are going out of the reach from the common man and values of the currencies are also depreciating. If we look for the reasons behind the rise in the inflation we can find many reasons like covid, supply chain disruptions due to the blockage of suez canal last year and the recently out broken war between the Russia and Ukraine. Though many countries have recovered from the covid led crisis they have again effected due to the war between the Russia and Ukraine and also due to the sanctions imposed against the Russia by the major economies as the Russia is the one of the major exporters of the crude oil in the world. Due to sanctions against Russia the crude oil became expensive making the transportation and logistics expensive and finally making the cost of production expensive So due to all this there is a cost push inflation all over the world.

India being the most developing the nation in the world gone through the so called ‘V’ shaped recovery after the pandemic but similarly the inflation also grown in the same way. The CPI inflation in India has reached to its peak showing the situation of the consumers in the country.   The prices of essential commodities and the fuel have been soaring up, rise in fuel prices has been a major worry for the industrial sector as it is increasing the cost of production and leading to cost push inflation and similarly after the series of lockdown opening up the economy by incentivizing the people  keeping the interest rates constant for almost two years and announcement of fiscal stimulus  packages made the aggregate demand in the market to rise leading to demand pull inflation. This is a rare case where both cost push and demand pull inflations are going hand in hand moving in the same direction. This is a kind of phenomenon where generally government can do a little to control the inflation and the monetary policy of the country is stagnated.

Now if we try to go the roots of our economy and think about our economic situation we can find the demons which are responsible for all this mess. Just before a year fuel prices in India were in a range of 75-85 per liter but then during unlocking the economy both central and state governments have increased taxes that are imposed on the fuel since fuel products are outside then purview of the GST state governments have the right to impose all possible kinds of indirect taxes on the fuel so due to all this the prices reached to a range of 95-110 per liter that is around Rs.50-60 is being imposed as the tax on the fuels like diesel and petrol, if we in detail we can see in states like Andhra Pradesh, Telangana  where the prices of the fuel are over Rs.105 highest in the country are imposing over 50% of taxes on the fuel prices.

Now if we think why the central and state governments are increasing the taxes then we can find that governments are running short of revenue so to meet up the required revenue they are imposing the taxes. Listening to this one might have a doubt that over the past one year the GST collections of the government have been recording high every month so why will they run short of revenue then the answer is simple that is the fiscal debts of the central and state governments. The fiscal deficits of the both central and state governments have been rising over the years and the main reason behind the rising fiscal deficits of the both central and state governments is the freebies offering by the governments, according to the election commission of India and SBI about 50% of the debt of the governments is due to the freebies offering by the governments. Generally before every election all the political parties in the country in order to attract the voters will offer a lot of freebies in their election manifesto and after winning the elections in order stay on the words given before the election they are borrowing the money from all the sources possible and spending the money on the freebies. Now In order to finance the debt, they need revenue but due to pandemic the aggregate demand has fallen so to incentivize people they cannot directly increase the interest rates in the economy so they are left with only one option and that is tax so the governments are making most of it by increasing tax on the fuel.

It is the time to people of India to realize that they are not getting any benefits from the freebies given by the government and instead they are losing more and more money due to that. It is also time for the Indian politicians and the policy makers to realize the adversaries of the freebies and they have to think about reducing the freebies that they are offering, freebies are very much important in any economy for the betterment of poor but there shouldn’t be too many freebies which make the people lazy and increase the economic inequalities in the country. This is the right time to educate people economically and bring back the growth of the nation on track.