Inflation looks OK, 1% GST-tax will hit Make-in-India
Though the RBI’s inflation forecast, on June 2, will shed more light on the likely inflation in FY16 —an even clearer picture may have to await the Met’s monsoon forecast, which will come around that time—chief economic advisor (CEA) Arvind Subramanian is right to be optimistic about inflation-control, even in case the monsoon is deficient.
For one, with cereals accounting for nearly a tenth of the entire CPI basket—and more than a fifth of the foods and beverages component—as compared to under 7% for fruits and vegetables whose prices tend to rise the most in a poor monsoon year, the government has the wherewithal to dampen inflation. On July 1, to cite one number, India will have 60 million tonnes of wheat and rice stocks as compared to even the enhanced buffer norms of 42 million tonnes—so, if extra stocks are dumped on to the market, cereal inflation can be brought down to near zero; it has to be admitted, though, that progress on selling stocks has been poor in the NDA’s first year. Hiking MSPs, due anytime now, is also likely to be a muted affair since, with global prices collapsing, the scope for increases is much less. Pulses will be a problem—CPI inflation is up from 5.4% in April 2014 to 12.5% in April 2015—though oilseeds will not, given global prices continue to fall. Inflation in oil and fats was 1.8% in April 2015 as compared to 2.8% in April 2014—indeed, with a 15% import duty on refined palm oil in place at the moment, there is scope to further dampen this. In which case, there is probably scope for the central bank to cut rates by 25bps on June 2, though it is not clear whether that will move the private consumption needle much—short-run growth, as the CEA has said, depends upon what happens to public investments and private consumption growth.
While the CEA has expressed satisfaction on the inflation front, his comments on GST are quite worrying and both finance minister Arun Jaitley and prime minister Narendra Modi would do well to pay heed to what he is saying. As FE has been arguing, the 1% additional tax levied on ‘supply’, not ‘sale’ of goods, will end up as an additional 3-4% levy as inter-state branch transfers will also get taxed, and will end up hitting the Make-in-India programme as well since imports will face lower imposts—indeed, in a hard-hitting op-ed in Business Standard along with Arbind Modi earlier this month, the CEA pointed to how excise exemptions of the type envisaged in the GST would be equally damaging. While the 1% additional tax, believed to have been agreed to because producing states like Gujarat were batting for it, has been justified on grounds it is only for a period of 2 years, there is no certainty this will be the case. Since the tax can be extended by the GST Council, and no one, including the Union finance minister, has a veto there, there is every possibility it will be extended. It is to be hoped the Congress party will oppose this since the Bill is now in front of a parliamentary panel, but in the meantime, both the FM and the PM will do well to hear out their top economic advisor’s concerns on GST.