Thursday, December 26, 2024

Where the buck stops.

"The combination of monetary policy stance and macroprudential measures by the central bank, and structural factors, may have contributed to slowdown in demand, a finance ministry report said on Thursday (yesterday) in the latest sign of divergent views between North Block and the Reserve Bank of India (RBI)." TOI. The attempt at shifting blame is because, "India's Gross Domestic Product (GDP) growth slowed down to 5.4% during the second quarter of the financial year 2024-25 due to the falling growth rate in manufacturing, consumption and mining." HT. This sleight of hand is mendacious because the RBI is but a department of the Ministry of Finance. "Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India." rbi.org.in. "An impression has been created that India's FIT (flexible inflation targeting) is failing the country on growth," but "The ministers need to deconstruct another puzzle for the public: the reason industrial capacity utilization has ranged around 75% for close to 10 years. This indicates stagnating consumption demand, which is independent of interest rates but is overly influenced by inflation rates," wrote Rajrishi Singhal. "Add rising unemployment to the mix and the demand situation indeed looks grim." Indeed, consumer price index (CPI) inflation has been consistently above 4.5% (RI), since 2014, when the Bharatiya Janata Party (BJP) first grabbed power (wikipedia), except for 2017, 2018 and 2019 because of the sudden demonetization of the Rs 1000 and Rs 500 notes on 8 November 2016 (wikipedia). One very important contribution to inflation comes from taxes. While crude oil prices averaged around $100 a barrel from 2011 to 2014, oil prices plunged from 2015 to below $50 per barrel (Macrotrends). The government did not pass on the price advantage to consumers but raked in windfall profits by massively hiking excise duties on petrol and diesel  (mycarhelp line). Hence "Petrol tax in India consists of 55% of petrol's retailing price while diesel tax is 50% of the fuel's retail value." cleartax. In addition, "India's toll collection in 2024 could surpass Rs 700 billion, government data indicates." ET. The rising cost of transport is passed on to every goods and services thus increasing prices. Goods and Services Tax (GST) is collected as a percentage of the retail price. Total GST collections have risen exponentially from Rs 215.72 billion in July 2017 to a high Rs 2.10 trillion in April 2024. wikipedia. The RBI's mistake was in holding its interest rate at 4% for 24 months from May 2020 to May 2022 (BS) when it suddenly raised rates by 40 basis points in an emergency meeting (ET) to preempt the US Federal Reserve. Rake in taxes, push up prices, kill consumer demand, thus restricting investments, causing unemployment, and then blame the RBI. The buck stopped with President Harry Truman. Where does it stop with Dear Leader?    

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