Home / Budget 2019 / News /  Budget maths goes awry as retail prices pinch

New Delhi: A sharp rise in food prices has dealt an unpleasant surprise to the Narendra Modi administration, which is less than three weeks away from presenting the Union budget for the year starting 1 April.

Official data released on Monday showed retail inflation accelerated in December, led by rising food prices, especially of vegetables. The data presents the government with the problem of having to simultaneously look at ways to address the twin problems of sharply rising prices and a severe growth slowdown.

The high retail inflation will prompt the government to take a long hard look at the impact that public spending, meant to stimulate the economy, may have on inflation, which is regarded as a tax on the poor. With investments stagnating, many expect the government to keep public spending high to boost economic growth.

“The pressure on policymakers to take steps in the Union budget to push forward economic growth increases that much more," said Abheek Barua, chief economist and executive vice president at HDFC Bank Ltd.

The advance estimate issued earlier this month by the National Statistical Office showed that gross fixed capital formation, which had swelled nearly 10% in FY19, will barely improve by 1% in FY20.

The economy, which has been decelerating for six straight quarters to 4.5% in the three months ended September, has proved to be a big challenge for Modi, who has set ambitious targets for improving the living standards of people. Modi has been following a policy of wealth redistribution, with progressive rates of direct and indirect taxes and welfare spending in newer areas such as income support for farmers, pension for shopkeepers and schemes for improving water security.

The government will have to step up allocation for agriculture supply chain, particularly in the case of perishables, to ensure their smooth supply, said Barua.

Supply shortage of vegetables has also made the problems facing the agriculture sector evident. With extended rains impacting onion supplies, the government resorted to importing the commodity from Egypt and Turkey this year. The government is committed to doubling income levels of farmers, but the presence of middlemen and entry barriers in the agriculture supply chain makes it inefficient and less competitive, a government official said on condition of anonymity.

According to Govinda Rao, chief economic adviser at Brickwork Ratings India Pvt. Ltd, the continued increase in vegetable prices and a sharp uptick in the prices of pulses put pressure on food inflation in December, while fuel inflation turned positive after a gap of four months.

Rao said there is a fear of further escalation in crude oil prices due to tensions in West Asia. CPI inflation breached the 6% upper end of RBI’s comfort zone for the first time in 41 months, he said.

Rising inflation and the growth slowdown are likely to give the Opposition ammunition to criticize the government about its management of the economy. The Congress tweeted on Monday that the “government neither understands the problem nor can provide any comprehensive solution to the economic woes of the country. Inflation has skyrocketed and the common man will have to pay for this government’s incompetence," it said.

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