Home / Opinion / Views /  An agile approach has its share of downside risks
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The government’s surprise increase in duties on Saturday, a bid to ease price pressures, could exemplify the “agile" approach that found mention in the Economic Survey released earlier this year. The post-budget shake up in levies was an on-the-ball fiscal response to a fast-shifting situation—in this case, inflation. Among the measures, our fertilizer subsidy outlay was upped, fuel tax hikes of easy-oil times were reversed to push down retail prices, import tariffs were slashed on a slew of inputs for plastics and steel, and barriers raised for the export of iron ore and a dozen-odd other steel-sector items. The big objective of the exercise was to raise domestic supply levels and cool prices down. These off-calendar tweaks are consistent with the idea of ‘dynamic resilience’ that has gained traction in policy circles since the covid crisis. Given the uncertainty all around, such flexibility has commanded a premium. This is well deserved, for the most part, but also prone to hasty decisions with unintended consequences that can arise from top-down market interventions.

Broadly, the set of calls taken were welcome. Fuel excise cuts were long overdue and a farm sector exigency had to be addressed. The Centre’s math may well have indicated that the resultant fiscal crevice, placed at 2.1 trillion, could be covered by a larger GST mop-up than budgeted, given the tax buoyancy seen in recent months, and so this year’s 6.4% deficit target need not be at much risk. As for the effort’s impact on inflation, last reported at 7.8%, analysts estimate a reduction in a range of a quarter to half a percentage point. This sounds like too small a payback, but if it materializes, it would at least ease the central bank’s task of getting retail inflation back under 6%. Signals of action should also lower inflationary expectations, a win in itself. What should be a worry, however, is the suspicion that every move made last week was not weighed adequately.

First, consider the expected benefits. While the jury may still be out on inflation as a mostly monetary phenomenon, it is not clear to what extent aiming at specific items can help if it has got generalized. Second, think of hidden costs. A sudden reset of trade norms can disrupt business plans, compress profitability and distort markets for affected products. This was visible in our steel sector. Large companies saw overseas markets recede significantly enough to see prospective profits sag, causing a contraction in their stock market value, even as voices within the mining industry warned of iron ore stockpiles being accumulated. As seen earlier with wheat, temporary export clamps for supply retention can yield a chance for local traders to buy cheap and hold on for better prices later. This week, it was the turn of ferrous-item value chains to shudder. The fact that Indian rules of play can shift overnight would also have pushed up the risk assigned to policy instability. In such an environment, anything seen as a contributor to inflation may begin to look like a potential target. This would go against our larger aim of integration with global production networks for a growth boost. State impositions are always costlier than made out to be. In general, private enterprises must be allowed to thrive freely within well-accepted bounds. No doubt, inflation quickly needs to be brought under control. This is a job for the Reserve Bank of India. The government, on its part, can always chip in with fiscal relief. But it must ensure that proper deliberation precedes every display of agility.

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