“ Effectively speaking, the massive surge in food prices is an all-pervasive global phenomenon, due to severe drought and unpredictable weather in large parts of the world. Hence, to single out India, which has actually capped retail inflation in single digits, is both unfair and unacceptable. ”
In the last few days, inflation has been the focus of numerous discussions on television debates, Op-ed columns and of course, India’s debilitated opposition is also using inflation as a tool to target the Modi government. In this piece, I wish to explain with hard data, how the Modi government has waged a relentless war against inflation and has been very successful too. Indeed, Consumer Price Index (CPI) or retail inflation as it is called in layman's language, rose to 6-month high of 6.3% in May 2021, compared to 4.23% in April. Core inflation also rose from 5.4% in April, to 6.55% in May. RBI has now been tasked with maintaining retail inflation at 4%, with a margin of 2% on either side of the band, until March 2026.
India’s retail inflation jumped to 6.3% in May primarily, on account of higher food and energy prices, as per data released by the Ministry of Statistics and Programme Implementation (MoSPI). Food inflation accelerated to 5.01% in May, as compared to 1.96% in April, within the CPI basket, while fuel inflation in May 2021 rose to 11.58%, from 7.91%, in April 2021. Interestingly, vegetable inflation was a negative 1.92% in May, compared to a negative 14.18% in April 2021. Record food grain production in FY21 at over 303 million tonnes with record procurement by the Modi government has capped any rise in vegetable prices. The moot question then is, while vegetable prices remained subdued, why did retail inflation in May rise sharply? Why did the food inflation jump? Large sections of India’s ignorant media will not tell you that while prima facie a 6.3% rise in retail inflation may look high, India has actually done a fabulous job in curtailing runaway prices. What the media is not telling you is the fact that global food prices measured by FAO Food Price Index (FFPI) have actually risen by a huge 39.7% in May 2021, compared to May 2020. Similarly, global cereal inflation is up by 36.6% in May, year on year (YoY). Again, global wheat prices in May 2021 have risen by a sharp 28.5% over May 2020, while dairy product prices internationally have surged by 28%. The highest surge globally has been in the case of maize, which saw a solid 89.3% rise in inflation in May 2021, compared to May 2020. Effectively speaking, the massive surge in food prices is an all-pervasive global phenomenon, due to severe drought and unpredictable weather in large parts of the world. Hence, to single out India, which has actually capped retail inflation in single digits, is both unfair and unacceptable.
The RBI, which mainly factors in retail inflation while arriving at its monetary policy, had left the key interest rate unchanged earlier this month. The central bank has projected the CPI inflation at 5.1% during 2021-22; 5.2% in Q1; 5.4% in Q2; 4.7% in Q3; and 5.3% in Q4 of 2021-22. Wholesale price-based (WPI) inflation too accelerated to a record high of 12.94% in May 2021, led by the base effect, given that in May 2020, WPI was minus 3.37%. Rising crude oil prices, that globally filtered down to higher domestic prices, via imports, added to the uptick in WPI. In April 2021, WPI inflation was 10.49%, again driven by the base effect, given that in April 2020, WPI was minus 1.57%. Below, I also analyze how despite crude oil prices rising globally by a massive 300% in the last 14 months, the Modi government has managed to rein in fuel prices. It needs to be noted here that while food has a greater weightage in CPI, fuel as a category has a larger weight in WPI. Since the rise in fuel prices leads to higher transportation costs and thereby higher cost of essentials too, the next few paragraphs are completely devoted to dissecting fuel inflation in India. I also explain how it is not the central government but state taxes in Congress-ruled states that are the real reasons for the rising fuel inflation.
Brent Oil advanced recently to over $72 a barrel in June 2021, after the OPEC+ alliance has shown every inclination of continuing with production cuts. Any increase in oil output by the OPEC+ alliance, may not happen before July-August, 2021. The oil glut built up during the pandemic last year has almost vanished and inventory is depleting rapidly. OPEC’s Joint Technical Committee (JTC) forecast stockpiles will fall by at least 2 million barrels a day from September through December 2021. So unless the OPEC+ alliance decides to raise production in July, global crude oil prices will remain northward bound. A weaker dollar is also helping to push oil higher. Tight supply and strong demand from the USA and China could see Oil climb to $80 a barrel in the next few months, in the absence of Iranian supplies. New nuclear violations may derail Iran’s return to global Oil markets.
Iran recently said it has reached a broad agreement with the U.S. over the lifting of sanctions on its industrial sectors, including energy, but warned there was “very little time left” for world powers to revive and restore the US-Iran 2015 nuclear deal.
Saeed Khatibzadeh, spokesman for Iran’s Foreign Ministry, didn’t give more detail on the potential easing of trade restrictions, which have all but prevented the Islamic Republic from exporting oil and battered its economy. The landmark accord was being delayed because there are still sticking points, he told reporters in Tehran, on June 14, 2021. Indirect discussions between the United States and Iran, along with other parties to the 2015 deal on Tehran’s nuclear program, resumed on Saturday in Vienna and were described as “intense” by the European Union. A U.S. return to the 2015 deal would pave the way for the lifting of sanctions on Iran that would allow the OPEC member to resume exports of crude. It is, however, looking increasingly unlikely that we will see the U.S rejoin the Iranian nuclear deal in 2015 in its earlier and original format.
Asian refiners, meanwhile, are grappling with what’s expected to be a brief period of weak profits amid the demand-sapping, virus resurgence. Complex refining margins in Singapore, a proxy for the region, have slumped to almost zero, since the end of April 2021, but accelerating vaccination rates are expected to aid demand and margins, going forward. Exxon Mobil Corporation is pulling out of a deep-water oil prospect in Ghana just two years after the West African nation ratified an exploration and production agreement with the U.S. Oil titan, further adding to global supply tightness.
If by a stroke of luck, the U.S. and Iran do manage to conclude a deal to restore the terms of the 2015 nuclear agreement, which would allow Iran to produce 2 million barrels per day, then global Crude Oil prices could take a dip and domestic prices would follow suit. To meet rising demand, U.S. drillers are also increasing output. U.S. crude production from seven major shale formations is forecast to rise by about 38,000 barrels per day (BPD) in July to around 7.8 million BPD, the highest since November 2020, the U.S. Energy Information Administration said in its monthly outlook, recently.
The recent bull rally in global oil prices from a low of $18 a barrel in April 2020 to a high of over $72 in June 2021, effectively means, Crude Oil prices have risen by an unbelievable 300% in the last 14 months. Since more than 80% of India's Oil demand is met via imports, any surge in global Brent Crude price, obviously has a sizeable impact on India too, as both Petrol and Diesel are now fully deregulated. Maruti Suzuki, for instance, sells over 1.6 lakh units every month, on average, which means, it is selling about four cars every minute. Clearly, despite the brouhaha, Oil demand continues to gallop away, outpacing supply, also reflected in rising auto and bike sales.
Theoretically, every $1/barrel fall or rise in Brent Crude price, leads to a 0.45/liter reduction or rise in product prices, assuming "other things" are constant. However, other things like the rupee-dollar exchange rate, cess, refining cost, import duties, shipping charges, freight rates, and dealer commissions & profit margins, are never quite constant in the dynamic, real world. India's ignorant opposition has often alleged that under the inept, Congress-led UPA-2, despite elevated Brent prices globally, local fuel prices were much lower. Well, that is because fuel prices were only partially decontrolled under the inefficient, Congress-led United Progressive Alliance (UPA-2). It was Prime Minister Narendra Modi-led NDA government that took the unpopular but bold and long overdue decision of decontrolling Diesel prices too, in October 2014.
Hence, comparing fuel price movements under the Modi government, with the erstwhile, lethargic, Congress regime is unfair. Also, don't forget that the previous Congress-led UPA government took loans by purchasing Oil bonds of Rs 1.44 lakh crore, that the Narendra Modi-led NDA government inherited and paid for. Not only this, the Modi government also paid Rs 70,000 crore on the interesting part alone, which means, in total, the Modi government discharged debt obligations of the earlier Congress regime, by repaying over Rs 2 lakh crore. To nail the misinformation surrounding domestic fuel pricing, it is best to look at this real-time, for example--Petrol prices in Mumbai a few weeks back hit Rs 100 per liter. Of this Rs 100, the basic rate is Rs 32.97 per liter; Central government tax is Rs 21.58; State government VAT, surcharges, and levies are Rs 41.67 per liter; Distributor margins work out to Rs 3.78 per liter. Clearly, it is not the Central government, but State government taxes are the biggest component of Petrol prices and also the biggest reason, for the steep rise in domestic fuel prices. Effectively speaking, State government taxes account for 41.67% of the final Petrol price, whereas Central government taxes account for only 21.58% of the final Petrol price, per liter. Hence, before pointing fingers at the Modi government, opposition leaders like a clueless Rahul Gandhi, whose party, the Congress, is a vital part of the ruling alliance in Maharashtra, would do well to do some number crunching! In fact, along with VAT, disaster management cess, and highway liquor ban cess, the net share of State taxes in fuel prices, in Maharashtra is almost 50% and ditto is the case with Rajasthan, another Congress-ruled State, with the highest VAT.
India imports almost no petrol or diesel. It imports crude. But the price we pay for fuel is based largely on Import Parity Price or the price we would pay if India were to be actually importing petrol or diesel. India's export of Petrol and Diesel is more than imports. India's total imports in 2017-18 were worth Rs 744 million while total exports were far higher at Rs 23,858 million. Fuel is basically priced as if it is imported.
Oil refiners, who make these products in India, are paid what is called a Refinery Gate Price (RGP) based on the Trade Parity Price (TPP) which is a weighted average of the Import Parity Price (IPP) and the Export Parity Price (EPP). IPP is the price importers would pay if they actually imported the product. So, it includes not just the cost of the fuel itself, but also freight charges, insurance, customs duty, and port charges. EPP is what somebody actually exporting the product would get. IPP has an 80% weight and EPP only 20% in the TPP.
This method of calculating the price to be paid to refiners means that whenever international Oil prices rise, they get a windfall. That is because Customs is an 'ad Valorem rate or a percentage of the basic value, unlike a specific duty which would remain fixed irrespective of basic price. Since customs duty is 2.5% of the imported price, it goes up in absolute terms as the basic price does. So, at $100 per barrel, the duty on a barrel of petrol would be $2.5 while at $200 per barrel it would be $5. India has to import 80% of the raw material (crude oil), so Export Parity could not be an option, and hence an 80:20 trade parity pricing (TPP), was implemented, in line with the C.Rangarajan report.
Interestingly, Customs on products is 2.5% but this is applicable only on 80% of the output, effectively making it just 2%.
There are several taxes on domestic Crude such as National Calamity Duty and State Entry Tax. These are largely absorbed by the public sector oil refiners. So after adjusting these, the effective Customs duty is minimal. Effectively speaking, the burden of Customs duty is largely borne by public sector refining companies, and hence to allege that refiners make abnormal gains, if global Crude prices go up, is absolutely false. To cut a long story short, with the State-level value-added tax (VAT) and Sales tax is levied on an Ad-Valorem basis, tax revenues of States from Petrol and Diesel, rise in tandem with the increase in their prices. Elevated fuel prices, however, do not however, help the Centre much, as the Excise duties on Petrol and Diesel levied by the Central Government, are specific in nature, like flat rates, so whether Petrol is Rs 70 or Rs 100 per liter, is largely meaningless, for Central government from a revenue standpoint. On the contrary, the biggest killing is actually made by States, which charge Ad-Valorem rates and the higher the price of Petrol and Diesel, the higher the taxes earned by States.
Again, it is nothing but sheer hypocrisy to talk of rising Petrol and Diesel prices, but not give the Modi government credit for the fact that compared to 2013, when LPG gas cylinder prices went to as high as Rs 1270-1290 per cylinder, today average The price of an LPG gas cylinder is Rs 809. Do note that globally, LPG prices in the last few months have risen from $455 per tonne to over $600 per tonne, which is a 32% increase. Locally, in India, compared to 2013, LPG prices in the last 7 years, under the Modi government, have actually fallen by anywhere between a good 36-40%.
Recently there has been a surge in edible Oil prices, globally. Since India imports between 55-70% of edible Oils like Palm Oil, Soyabean Oil, and Sunflower Oil, domestic cooking Oil prices have risen too. Argentina, one of the biggest producers of Soyabean, faced huge crop losses after a severe drought. Malaysia and Indonesia curtailed exports of Palm Oil to India and other countries, after a big rise in local demand, due to a change in bio-fuel norms in these countries. Ukraine and Russia, amongst the largest producers of Sunflower Oil, also faced a debilitating drought, leading to a sharp surge in international prices of Sunflower Oil.
The good news is that the area under Oilseeds has expanded in India and output is expected to be higher than the previous year. The total acreage under Oilseeds increased by 18 lakh hectares or 10% during the 2020 Kharif season, aided by the increased availability of labor after migrants workers returned to their homes in rural areas. The acreage for groundnut rose 30% and for soybean by about 7%. Similarly, the acreage under Oilseeds in the 2020-21 Rabi season was up by 4%. Mustard is the primary Oilseed grown during the winter cropping season and the area under the crop is also up by 5%. According to the third advance estimates of production for the 2020-21 agriculture season, Oilseed output expanded by 10% to 365.65 lakh tonnes, with the Soybean crop rising almost 20% and mustard by 10%. Hence, cooking Oil prices should come down, going forward.
India, under PM Modi, has the enviable accomplishment and unique distinction of already vaccinating over 255 million people with the first dose of the Covid vaccine, in what is clearly the world's fastest and most ambitious vaccination drive. By December 2021 or even earlier, the entire adult population of India will be vaccinated. The Union Budget for 2021-22 set aside Rs 35,000 crore for the Covid vaccine, though the actual cost that will be borne by the Modi government eventually, could be much higher, at anywhere between Rs 45,000 to Rs 55,000 crore. Allocation of Rs Rs 2.23 lakh crore for health, is a 137% jump in 2021-22, over 2020-21. Again, Rs 1.18 lakh crore for road infrastructure, Rs 1.10 lakh crore for railways, an outlay of Rs 3.6 lakh crore for the power sector, and Rs 16.5 lakh crore towards agriculture credit outlay in the Union Budget, showcase how the Modi government is spending money judiciously, towards a healthier, fitter, and better India.PM Modi is not someone who indulges in profligate spending. Every penny spent by the PM is money wisely spent. For example, Defence allocation at Rs 4.78 lakh crore, which is up 19% in FY22, over FY21, is aimed at a safer and secure India. Hence, allegations that resources raised via fuel taxes are being frittered away, are absolutely baseless.
To cut to the chase, India, under Prime Minister Narendra Modi, is planning to increase natural gas consumption by 2.5x, as part of the energy mix, to 15.5% by 2030, from the current level of 6.2%. The ongoing transition from an "Oil economy", to a "Gas economy", under PM Modi's visionary leadership, is steadfastly underway. Over 70% of India’s population in over 400 districts will have a city gas distribution (CGD) facility, soon. Only 25 lakh households in India had access to piped natural gas (PNG) in 2014 but thanks to the Modi government’s persistent efforts, that figure more than quadrupled by 2021. Again, India only had 947 CNG stations in 2014, that number rose to 1470 stations in 2018 and is set to scale up to a massive 10,000 CNG stations in the next few years. Since CNG is anywhere between 45-60% cheaper compared to Petrol and Diesel, this will make India self-reliant, in more ways than one.
Also, financial assistance is being extended by way of interest subvention for 5 years at a 6% rate of interest against the loans availed by sugar mills and distilleries from banks, for setting up their projects. The existing installed capacity of molasses-based distilleries has reached a massive, 426 crore liters. In 2020-21, the target has been, to supply 325 crore liters of ethanol to OMCs for achieving 8.5% blending. In the next few years, with 20% ethanol blending with Petrol, the Modi government will be able to significantly reduce the import of crude oil, is a big step towards being Atma Nirbhar in the petroleum sector and thereby sustainably reducing fuel inflation.
Ms. Sanju Verma is an Economist, National Spokesperson of BJP & Author of the Bestseller, "Truth&Dare--The Modi Dynamic".
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