Inflation en-route recovery

‘Spending is rewarding,’ says the advertisement of a bank debit card. The common man has more money in his pocket now. It is the day after budget and this is what Pranab Da said a day earlier in Lok Sabha without putting it in exact words. In his speech dada said that the economy is back on track, but our careful and seasoned Minister did not rush to take back the stimulus. Fiscal reconsolidation is clearly need of the hour, yet the biggest concern for the aam admi is inflation, something that the budget misses at it talks about inclusive growth. The rise petroleum prices were perhaps the least expected announcement. The excise hike hijacked the whole attention and it was protest echoing inside and out side Parliament ignoring the other aspects of the Budget. Though the FM conservatively announced that the hike will add only 0.41 per cent to the wholesale price index based inflation, the overall effect was selectively ignored. The fear is that this hike will seep into other sectors as energy costs raise. The Budget assumes inflation to average close to 4.5 per cent for 2010-11. This is as per the Reserve banks guidelines which says that in ideal conditions inflation should remain at 4.5 per cent in short term (one to two years) and 3 per cent in long term. The roadmap towards achieving this end is uncertain. Inflation is above 8.5 per cent. The food inflation on the other hand is already sky rocketing touching 18 per cent mark. A person who spent 1000 rupees on food last year, spends 1,170 rupees on the same items at present. This hidden tax is costing heavily the lower and lower middle class. Though the budget has given major exemptions in income tax, the benefit is only for the higher income groups. The real sufferers of the hour are those who already had their income below taxable limits. Shashi Ranjan Kumar, a migrant from Uttar Pradesh working at a showroom in Delhi is one of those worst effected by the price rise. With an annual income of 96,000 per year and a family of five to support, Shashi has nothing to cheer for. “Our condition remains the same, the government is talking about aam admi, but tell me what has a common person like me benefited from the budget. We can not even eat properly, leave alone savings,” says a disappointed Shashi. Speaking on price rise a day before, the FM blamed the crisis on “huge cost of intermediation between farm and kitchen” seeking discussion and suggestions from the MPs. The demand and supply gap has been called as the major factor repeatedly by the government; however, the policy gap is clear. It is disheartening for the spirit of a socialist economy to announce its failure in maintaining its distribution system.
In such scenario, the Budget has filled the pockets of the class that can spend. 25 million tax payers earning over 8 lakh rupees a year will save 4,500 rupees per month. This will without any doubt go to the consumer market further raising the demand. The fears that were there before the budget was announced seem to be coming true with some spurt evident on inflation front. On the other hand, increasing the coverage of indirect taxes, government has secured its income as well. Money will also be pumped into banks to encourage lending. The government is on its path of fiscal reconsolidation after giving much relief last year. Relieved from adverse political pressures, this Budget paves a forward way for further liberalization. Yet, any major reformist decision has been restrained from. Noted Economist Swaminathan Ankleshwar Aiyar notes “The aam admi will get more rhetoric than cash.” Huge expenditure on social sector may generate some benefits for the common man, however, with price rise and a failed distribution system, as the government itself accepted, the common man has been left dry.