How government modified economy to rein in rising inflation in India — and also help neighbours
“The vision of LiFE (Lifestyle for Environment) is to live a lifestyle that is in tune with our planet and does not harm it. And those who live such a lifestyle are called Pro-Planet People. Mission LiFE borrows from the past, operates in the present and focuses on the future,” tweeted Prime Minister Narendra Modi on the World Environment Day on 5 June 2022, showcasing his commitment to clean growth and green growth, that work on the avowed maxim of a zero-carbon lifestyle. From 1.5 per cent ethanol blending in 2013, the number today is a healthy 10 per cent and is slated to move beyond 20 per cent in the near future, which will reduce not only India's carbon footprint but will also reduce the inflationary impact pertaining to fuel prices.
India’s commitment to reach 40 per cent of installed electric capacity from non-fossil fuel-based sources has been achieved, nine years ahead of schedule. In this piece we examine how Modinomics has deftly surmounted challenges arising from global inflation and how Prime Minister Modi has taken the frontal lead in delivering sustainable growth, combating inflation and ensuring the right mix of welfare economics with development economics, backed by fiscal stability.
Take inflation for example. India's retail inflation measured by the consumer price index (CPI) soared to 7.79 per cent for April 2022. In March 2022, the figure for consumer price-based inflation was 6.95 per cent and 4.21 per cent in April 2021.The recent spike in CPI is mainly on account of costlier food items. Despite perception to the contrary, the fact of the matter is that the Modi government has reined in inflation pretty well in the last eight years and even the surge in the last few months is largely due to a confluence of global factors, including the Russia-Ukraine war. Also, after two years of a debilitating global pandemic, there has been a sudden demand resurrection, while the supply chain constraints have failed to keep pace with the rise in demand globally. So for armchair economists to single out India and allege that the rise in inflation is only India-specific is a lot of hogwash. Supply bottlenecks take time to get resolved.
For instance, if an industry was working at 40-50 per cent capacity during Covid in 2020 and 2021, for it to work at 70-80 per cent capacity in 2022 will take time. Scaling up takes time. Any industrial unit will not automatically switch from 40 percent to 80 per cent in a jiffy. Alternative suppliers come with pricier freight, longer transits or differing quality, further accelerating food inflation. World supplies were already reeling from droughts in Canada and Brazil and transportation blockages in parts of the world, from rail logjams in the US to trucker strikes across Spain.
The added shock from the Ukraine-Russia war earlier this year sent most prices of most commodities to new, record highs, with corn and wheat futures in Chicago up more than 30 per cent since the beginning of 2022, after having already risen by over 40-5 per cent in 2021! The United Nations has warned that food prices — already at an all-time high — could rise as much as 22 per cent more. A severe drop in Black Sea exports could leave as many as 13.1 million additional people undernourished, it said, deepening the rise in global hunger in a world still recovering from the effects of the pandemic.
Collectively, Russia and Ukraine are responsible for more than 25 per cent of global wheat exports and for around 80 per cent of the world’s supply of sunflower oil. Russia along with ally, Belarus, is also a huge source of fertilisers, accounting for around 15 per cent globally. The war in Ukraine will undoubtedly have a major impact on its agricultural production and exports, putting even more pressure on a system already in crisis. Ukraine does indeed control Europe's second-largest known reserves of natural gas, almost 80 per cent of which are located east of the Dnipro river. While Russia is the world's third largest oil producer accounting for 10 per cent of the global oil production, Ukraine has total gas reserves of 5.4 trillion cubic metres (TCM), with proven reserves at 1.1 trillion cubic metres.
Hence, to cut to the chase, the moot point is: The Russia-Ukraine war has affected the prices of oil and natural gas, with some estimates saying gasoline prices in the US could skyrocket to as high as $6.2 per gallon by the end of this year. Today's inflationary surge is global in nature and is being felt by most advanced economies, emerging markets and developing economies (EMDEs). During the last two years, most Central banks followed easy money policies, with most governments announcing massive stimulus packages to repair the ravages unleashed by a debilitating pandemic in the form of COVID-19. In 15 of the 34 countries classified as AEs by the International Monetary Fund’s World Economic Outlook, 12-month inflation through December 2021 was running above 5 per cent.
The year 2022 has only seen the inflationary tide rising further, globally. While other countries have been reeling from pandemic-induced inflation, India has been keeping inflation largely under control. To put things in perspective, one must note that wheat prices hit a high of $13 per bushel from $5 a bushel in the last two years, a massive 160 per cent jump. Corn prices globally rose by a steep 45 per cent year on year (YoY) in 2021 and have risen by another 37 per cent in the first four months of 2022. Soyabean prices rose from $9 to over $17 per unit in the last 18 months, a whopping 89 percent jump.
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Inflation in the US continued to surge to a massive 8.5 per cent and 8.3 per cent in March and April 2022, after an equally steep rise of 7.9 per cent and 7.5 per cent in February and January 2022 respectively. That is the biggest year-on-year leap since 1981. Fuel inflation in the US rose by a whopping 32 per cent year on year (YoY) in March 2022, while food inflation went up by 8.8 per cent YoY, in March. The price of beef rose 16 per cent, flour by 14.2 per cent, citrus fruits by 19.5 per cent and milk by 13.3 per cent in March 2022, in the US. The annual inflation rate in the euro region rose to a record high of 7.5 per cent in April 2022, up from 5.8 per cent in February 2022 and 5.1 per cent in January. The UK's annual inflation rate rose in April 2022 to a steep 7 per cent, up from 5.4 per cent in January 2022, the highest level since March 1992, while Germany saw inflation at 7.4 per cent in April 2022, the highest ever in almost three decades. The Netherlands with inflation of 9.7 per cent, Spain with inflation at 9.8 per cent, Turkey at 70 per cent and Sri Lanka at 30 per cent, have seen the highest inflation print in over 45 years. In Canada, property prices have hit their highest in decades, rising by over 50 per cent in the last two years, due to which the Canadian government has banned outsiders from purchasing a property. Inflation as measured by the producer price index (PPI), increased 8.3 percent year-on-year in March 2022, after an equally steep rise of 8.8 per cent in February 2022 in China.
Seventy-eight out of 109 EMDEs are today confronting annual inflation rates well above 5 per cent. In India, in contrast, the Modi government has fared much better and has indeed done a commendable job in containing inflation. While retail inflation was 5.66 per cent, 6.01 per cent, 6.07 per cent and 6.95 per cent in December 2021, January 2022, February 2022 and March 2022 respectively, one should not forget that for the better part of 2021, inflation was below 5 per cent. For example, in September, October and November 2021, retail inflation in India as measured by the consumer price index (CPI) was reined in at 4.35 per cent,4.48 per cent and 4.91 per cent. More importantly, food inflation in these months was minuscule at 0.68 per cent, 0.85 per cent and 1.87 per cent. One must not forget that food inflation as measured by the FAO food price index (FFPI), hit its highest level globally in 2021, the highest ever since 1970. But India has reined in food inflation pretty well, relatively speaking.
Under the Congress-led UPA, the highest food production achieved was about 257 million tonnes in FY13. The estimated foodgrain production for the agricultural year 2021-22 (July-June) is expected to be 316.06 million tonnes, which is an all-time record and higher than the 310.74 million tonnes recorded in 2020-21, which itself was a record. Wheat production is also expected to reach the highest ever level of 111.32 million tonnes during 2021-22, higher than the 109.59 million tonnes recorded last year. The total production of rice (Kharif and Rabi both) is also expected to reach an all-time record high of 127.93 million tonnes, higher than the last year’s rice output of 124.37 million tonnes, which again was a pathbreaking record.
Why has global food inflation hit multi-decade highs? Droughts, floods, and inclement weather in large parts of the world's food bowls and in Central America, Latin America and some major oilseed-producing countries, are the reason for soaring food prices. For example, Ukraine, Argentina, China and Russia, the largest sunflower oil-producing nations, faced inclement weather in the last two years. Ditto was the case with Kazakhstan, Mexico and Canada, among the big safflower oil-producing nations. As for palm oil, over 84 per cent is produced by Indonesia and Malaysia combined and besides bad weather which hampered production, both these countries imposed many export restrictions during Covid, further distorting the demand-supply dynamics for palm oil-importing countries like India.
Things in Indonesia are so bad that police have been deployed for 24-hour surveillance of cooking oil production and distribution as rising food prices become a key political issue in the country. The Indonesian police task force, intelligence agents and government employees are making sure companies are producing bulk cooking oil as targeted and selling it for below the 14,000 rupiah (98 cents) a litre price cap. The less said about Sri Lanka's traumatising economic crisis, the better. Fuel stations have run dry and even posh neighbourhoods have no electricity for almost 18 hours a day, with rural hinterland suffering from 24-hour power cuts. There is no diesel to run diesel gensets either.
Few months back, the United Kingdom faced a situation where its gas stations ran almost dry. Whichever way one looks at it, India under Prime Minister Narendra Modi has managed the economy very well, sidestepping geopolitical upheavals and violent price gyrations in the fuel and food economy that many other countries have been grappling with, unsuccessfully.
In fact, India is even being the good Samaritan and has agreed to extend a $1 billion credit line to Sri Lanka, so that it can procure essential items, food and medicines. In February this year, India provided $500mn via a loan facility to Sri Lanka for procuring petroleum products and tackling its energy crisis. Sri Lanka has forex reserves of barely $2 billion whereas India with over $600bn, has the 4th largest forex reserves globally, after China, Japan and Switzerland. Hence for ignoramuses to compare India with Sri Lanka, is plain hogwash. Be it Nepal, Afghanistan Myanmar or Sri Lanka, it is India under the Modi government that has come to the rescue of its neighbours by exporting foodgrains and other essentials to these countries.
Coming back to inflation, it is pertinent to ask, which two places in India have had the highest fuel price? Well, it is Parbhani in Maharashtra where in early April 2022, petrol cost Rs 121.38 per litre and diesel Rs 103.97 per litre. In Sriganganagar in Rajasthan, petrol shot up to Rs 120.73 and diesel Rs 103.30 per litre, in April. In both the aforesaid states, the Congress is in power, either directly or via an alliance. In Congress-ruled states, the average petrol price is higher by Rs 18-21 per litre, compared to many BJP-governed states. The reason for this difference is nothing but pure greed on the part of Congress regimes, whereby they refuse to cut VAT on petrol and diesel. So while Rahul Gandhi and his sundry bunch of protesters are crying wolf over rising fuel prices in India, the harsh truth is that Congress-ruled states are milking their taxpayers dry by refusing to cut VAT in any meaningful measure. So much for Rahul Gandhi's hypocrisy!
This Part 1 of a two-part series.
The author is an economist, national spokesperson of the BJP, and the bestselling author of ‘The Modi Gambit’. Views expressed are personal.
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Sanju Verma
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