For nearly six years, the Modi Government was fortunate to enjoy a benign rate of inflation. In fact, low inflation was an achievement of the government. Prices of consumer goods, including fruits and vegetables, were generally stable. Barring a few weeks around the festival season when onion prices shot up and became headline news, food inflation were not a headache for the rulers. However, of late not only prices of onions and tomatoes but even of everyday vegetables have been in the grip of an upward spiral. This is now a talking point against the government with the opposition parties pinning the blame for the hardship of the consumers on the failure of the government to manage the economy. The Opposition noise could be ignored if the matter did not have larger implications for the economy. According to an update released by the National Statistical Office, consumer price index (CPI) shot up sharply to 7.35 per cent in December last from 5.54 per cent in the previous month. The food inflation by itself was 14.12 per cent in December last as against 10.01 per cent in November. Aside from other fall-out, the latest inflation rate breaches the RBI’s prescribed band of 2-6 per cent for targeting inflation. Which means there is no longer a scope for the central bank to revise down the prime lending rate. Having taken a breather from successive modest cuts in policy rates in previous meetings of a total 135 basis points, the monetary policy committee of the RBI retained it unchanged in the December meeting, anticipating inflationary pressures building in the economy. Normally, rise in prices of vegetables and fruits in late November and early December moderate once the supplies pick up at year-end. However, it seems the rise in prices of food items may not be transitory. Indeed, the fear is that soon the spurt in vegetable and fruit prices may spill over to milk, eggs, and other dairy and poultry items. The problem of food inflation is further compounded by the slow growth rate. How the coming Budget will grapple with the twin problems remains to be seen, but fiscal space for the Finance Minister is rather constricted. With the monetary policy having reached its limit, leaving RBI’s monetary policy committee little wiggle room to further ease the policy rate, the onus is on the Finance Minister to grapple with the challenge. Given that the government is under pressure to offer sops to the middle class, especially a cut in income tax rates, it is hard to see how the Budget can meet both popular expectations and the need for raising additional revenue amidst a slowdown. As it is, the borrowing of the government has far exceeded the budgetary limits, causing concern about rising deficit financing. Off-the-budget accounting which both the UPA and the NDA governments have liberally resorted to actually distorts the wider economic picture, making it harder for an orderly management of the economy.
In the current scenario, when the GST collections have fallen far short of the projected growth targets, and when the collective deficit of the States too is not insignificant, and when there has been no success in raising additional funds through disinvestment, Nirmala Sitharaman faces an uphill task presenting a please-all Budget. Vast sections of business and industry, presently in the grip of near-recessionary pressures, too have pinned their hopes on a stimulus in the Budget. How these expectations can be squared with the dire need to raise fresh revenue for infrastructural development, for paying for the ever-rising list of welfare schemes, is hard to see. Meanwhile, the central bank’s monetary policy committee which is due to meet a few days after the Budget will be under pressure to try and moderate inflation within the prescribed 2-6 per cent band. Failure to keep inflation within the prescribed band for more than three successive quarters will require the RBI to explain the reasons thereof. So far the situation has not occurred, but whether the committee feels obliged to raise the policy rate to tame inflation in the coming months will depend crucially on the consumer price index. Indications so far are not very promising, however.