Saroj Kumar
The data has once again reminded the general public of the pockets of inflation. The figures for the month of May show that inflation is unbridled. Policy-makers have taken some measures, but concrete results are not visible. Of course, people are getting scorched in this heat of inflation, but its flame will reach even those who are feeling safe at the moment.
In May 2022, inflation based on the Wholesale Price Index (WPI) rose to a 30-year high of 15.88 percent. It was 15.08 percent in April. Wholesale inflation has remained in double digits for the last fourteen months. It is expected to remain elevated in the coming months as well. The rise in wholesale inflation increases the cost of manufacturing, the cost of which is ultimately borne by the common consumers. The Russia-Ukraine war is being cited as a major reason behind this height of wholesale inflation.
Due to the war, high prices of crude oil, metals and food items are skyrocketing in the international market. But one of the main reasons that is not being mentioned is the weakness of the rupee. Had the rupee strengthened, it would have been easier to compete with the inflation in the international market. The reasons for the weakness of the rupee are not only external, but there are also domestic reasons for this. But the question is how to solve it.
Weakness in the market system based on the principle of demand and supply simply means that the demand for the rupee has decreased. The demand for the rupee increases when foreign investment comes into the country, whether in the form of foreign direct investment (FDI) or foreign institutional investment (FII). The World Investment Report (WIR) of the United Nations Conference on Trade and Development (UNCTAD) shows that during the financial year 2021-22, FDI inflows into India declined by thirty percent to $45 billion. cause?
Major cases of mergers and acquisitions did not materialize. In the financial year 2020-21, mergers and acquisitions in information and communication technology (ICT), health, infrastructure and energy saw a jump of eighty-three per cent with total inflows of $27 billion. But in 2021-22, mergers and acquisitions fell by seventy percent to just $8 billion. Whereas the situation of the epidemic was better in 2021-22 than in 2020-21. The government nevertheless reports a two percent jump in FDI during 2021-22. According to him a total foreign investment of eighty four billion dollars has come. In fact, FPI inflows and income reinvestment have also been added to this figure to make this figure appear larger.
The condition of FPI is not better than that of FDI. Foreign institutional investors sold forty four thousand crore rupees in the month of May alone, which is the biggest monthly sell-off since March 2020. With this, till May this year, the total figure of FPI selling has reached one lakh seventy one thousand crore rupees. The endless cycle of FPI selling continues this month as well. Such a decline in foreign investment simply means that investment in India is no longer profitable and safe in the eyes of investors.
They are finding America a safer and more profitable destination. With the move of the Federal Reserve, the dollar is climbing to new heights of strength. The Federal Reserve has increased the interest rate three times by 1.5 percent from March 2022 to June 2022. The increase of seventy-five basis points on June 16 is the highest in thirty years. Investors are running towards the dollar and dollar is rising fast while rupee is coming down at the same pace. The value of rupee against the dollar has reached below seventy eight. One reason for the strength of the dollar is also the high price of crude oil in the international market.
There are also domestic reasons for the weakness of the rupee. If timely steps had been taken to deal with the social and political unrest that emerged amid inflation, unemployment, then the situation would not have been so bad today. Investors come to a country only when the environment is favorable in all respects. Investment will come only when the rupee strengthens, the cost of manufacturing will come down, the inflation rate will come down, the demand in the market will increase, employment will be created and finally the economy will be strong. However, the Reserve Bank of India (RBI) has taken steps to strengthen the rupee. The bank has increased the interest rate by 90 basis points twice in May and June 2022. But its impact on the health of the rupee is not yet visible.
However, the rate hike of RBI is making loans costlier. Ninety-four percent of the people’s earnings decreased during the epidemic and still people are barely able to run their homes. In such a situation, expensive debt is going to have a bad effect on the financial health of the people as well as the mental health. The installments (EMIs) of borrowers are increasing and people planning to take loans are changing their intentions. The biggest impact of this is to be on the real estate sector, which is still in the process of recovering from the slowdown of the pandemic.
If the demand for houses falls, the construction of new houses will stop. The workers employed in this sector will become unemployed. Unemployment will increase. The demand in the market will decrease further. This policy initiative of RBI is going to increase inflation, unemployment in a way. But this initiative is going to continue.
Yes, the government’s fiscal measures to reduce inflation have started showing some effect. In May, excise duty was reduced by Rs 8 on petrol and Rs 6 on diesel. Import duty on soybean and sunflower oil removed. Due to this, the retail inflation rate in May moderated slightly and it came down to 7.04 percent from 7.79 percent in April. However, it is still well above the RBI’s maximum required limit of 6 per cent. The government still needs to do more work on the fiscal front.
Lower oil prices, especially diesel prices, reduce transportation costs and bring down consumer goods prices. Therefore, there is a need to further reduce the excise duty on petrol and diesel. So far only that part of the excise duty has been reduced which was increased during the period of March 2020 and May 2020 during the pandemic.
Oil distribution companies have not made any change in the price of petrol, diesel after April 6, 2022, despite the high price of crude oil in the international market. Of course, this is causing them an economic loss, but this loss is inevitable to control inflation, maintain demand in the economy. High inflation in the absence of earnings is a fatal trend.
This situation should not last long. The burden of inflation on the mind should not increase so much that the feeling ends. Due to this a large section of the society can be outside the purview of the economy. This would be an economic earthquake. Some of its symptoms have started appearing. Therefore, stopping it in time should be the first priority.