ITS NOT RBI WHO CAN BRING DOWN INDIA'S POLITICAL INFLATION

 The biggest impact of the Russian and Ukraine war has been to the delivery boys of food delivery and 10-minute delivery GiG Workers.

These GiG workers have been the biggest suffers in India which imports around 85% of the crude.  When covid was ruling the Indian economy this delivery and supply chain industry created significant jobs for the unemployed or those who got significantly impacted due to business shut down.   They had bikes and scooters to deliver and make a living. But due to rising crude prices, this segment has moved into bicycles. This also raises the demand for EV scooters since the cost of operating becomes less as compared to the crude dependent mode of travelling.

These delivery boys used to deliver using bikes and scooters and have suddenly moved into bicycles. Now please trash up with a healthy mode of travelling and non-pollution. They are using cycles to travel long distances like 5 km even 10 km for the delivery of foods and grocery items. This segment of society is getting significantly damaged due to rising crude prices.   

The retail inflation and cut down in housing budgets and also a reduction in savings will come into play.  The hike in gas prices is the biggest impact on the middle class where household inflation will start increasing. Few SIPs might get stopped particularly from the middle-class society investors.  Pulling out funds from investments to adjust household inflation is now going to be witnessed across the board.

The prime reason for moving out from bikes and scooters is that the cost of operating and profit in hand has become negligible.  The story does not end here. The margins have come down for every product for the vendors who are selling the products. From Rs.2/3 it has come down to 1 rupee.  This is just the beginning. The war might get over but the commodity prices and particularly the food commodity cycle will suffer the most. High inflation will bring up the cost of living and simultaneously the number of poor or just below the poverty line numbers will increase.  

Mid-day school food qualities will be compromised significantly.  This mid-day meal has been one of the key attraction points for the kids to travel to school from long distances. But this is now on the verge of getting significantly impacted by rising food prices.  This will be another major blow. Child labour will increase and students’ education will take a hit.

Crude prices may not come down to below 100/barrel but the state government have significant leeway to bring down the state vat added on these oil prices.

In 7 states, half of what you pay is collected as tax.

·       Maharashtra 52.5

·       Andhra 52.4

·       Telangana 51.6

·       Rajasthan 50.8

·       MP 50.6

·       Kerala 50.2

·       Bihar 50.0

Now you will find that in 3 states, State taxes are higher than central excise duty tax. Maharashtra, Andhra Pradesh and Telangana. Now as per the Petroleum Planning & Analysis Cell, Ministry of Petroleum & Natural Gas, Central excise duty is fixed ₹27.9/litre. VAT tax varies across states. For Maharashtra, we used 25% VAT+₹10.12/Central ED Tax.

Now, these states have the provision of bringing down inflation but simply reducing the state taxes.  We compel the central government to bring down the prices of crude but actually, the responsibility of the same lies in the hands of the state governments. You think that the RBI rate of interest hike will bring down inflation. Well, it will bring down consumption and not the real prices. It’s not the liquidity that is pushing inflation in a country like India.   Fitch and other rating agencies might cut down the GDP outlook but the rationales of inflation are quite different as compared to what the U.S economy has.   India’s inflation is politically driven. The current inflation spooks the demand for tax cuts for the salaried class since they are the ones who end up paying honest taxes.  But we have deaf ears to hear the same.

Coming to the international markets U.S will not increase its crude production as expected to bring down the crude prices.  The reason is if crude production or investments increase then the Republicans gets funding which gives an upper hand to Trump.  Well, many macro-economic data might be analysed to justify the non-crude production of the U.S but the truth is a political reason.   Most importantly the OPEC countries and the Middle East will also like squeeze the global economy which is flooded with cheap liquidity, particularly from the pockets of developed economies. Now countries like India are just part of the collateral damage.  RBI interest rate hike will bring down GDP growth and demand of goods, rather bringing down the state taxes will help to get demand alive and grow in the FY-23.