Growing precarity

Context: Fuel levies must be cut to ease the burden on consumers reeling under rising inflation.

Cautionary signals of inflationary spiral

• High CPI-based inflation: Above RBI’s 6% upper bound for second straight month, with June’s CPI at 6.26% only a touch slower than six-month high pace of 6.3% registered in May.
• High Wholesale price inflation: At 12.07% in June, after May’s record 12.94%.

Drivers of high inflation

• Sharp increase in key food item prices: Including oils and fats, which surged almost 35% from a year earlier and gained 2.9% from May’s levels, as also egg, which jumped 19.4% year-on-year and 6.2% from preceding month, and pulses and products, which climbed 10% from June 2020.
• Fuel inflation (which excludes petrol and diesel): Surged to a record 12.7% in June driven by LPG, kerosene and rural poor’s mainstay, firewood and dung-cake.
• Transport costs remain persistently high as both petrol and diesel prices continue to rise, with the former averaging Rs 102.92 a litre in four major metros as on July 12, and diesel at Rs 94.
• With global crude oil trending higher, the unabated rise in domestic transportation costs is bound to reflect in retail prices of farm produce and products shipped from factories.
• Manufactured products price rise edged up to 10.88%.

Associated economic risks

• Worsening case for Medium and small-scale industrial sector: Already struggling to cope with pandemic’s impact on demand and overall finances, now face rising raw material and input costs.
• Continuing pandemic disruption and delayed recovery: With manufacturing activity contracting in June for first time in 11 months economy is visibly struggling to regain traction in wake of second wave, which has eroded demand and consumptive capacity in both urban and rural markets.
• Risk of uncertainties in agriculture sector: Looming possibility that this year’s monsoon rains may be less than adequate, either temporally or spatially, disrupting agricultural output.

Way forward: The Government must, at the very least, cut fuel taxes to ease the burden on consumers.