9 min read.Updated: 10 Jan 2022, 01:09 AM ISTVivek Kaul
Some measures from recent months explain how political expediency will determine future economic policy
Politics and economics are two different sides of what is perhaps the same coin. And nobody understands this better than a politician who is about to fight an election. Of course, the ability of politicians to use economics to try and win an election depends on whether they are in power or in opposition.
Politicians who are in power can do things that could potentially have an immediate impact on the economic life of the electorate, whereas, those in the opposition can only make promises. The ruling party can also make counter promises and match the opposition. In that sense, the incumbent has some advantages when it comes to electoral politics.
An excellent example of this is the decision taken by the central government to withdraw the three controversial farm laws which were passed by parliament in September 2020. A simple explanation for the withdrawal lies in the fact that state assembly elections are due in seven states in 2022. These states are Goa, Manipur, Punjab, Uttarakhand, Uttar Pradesh, Himachal Pradesh and Gujarat. Other than Himachal Pradesh and Gujarat, the other five state assembly elections are scheduled through February and March, including that in Uttar Pradesh—the state that sends the maximum number of MPs to the Lok Sabha. Uttar Pradesh continues to be primarily an agrarian state.
But this isn’t the only ploy undertaken by the central government in recent months. It has taken several other decisions on the economic front; decisions that will help improve the chances of the Bhartiya Janata Party (BJP) in the upcoming state assembly elections. A key thrust area is the efforts underway to manage perceptions regarding inflation in the minds of people. Here are some seemingly disparate, unrelated measures which explain how political expediency will determine economic policy at least for the next few months.
The fuel price gambit
There are two components to taxes on petrol and diesel. One is the sales tax/value-added tax, which is charged by the state governments and varies from state to state. And the second is the excise duty, which is charged by the central government. With effect from 4 November, the day the festival of Diwali was celebrated, the excise duty on petrol was cut by ₹5—to ₹27.90 per litre—and that on diesel was cut by ₹10—to ₹21.80 per litre. This pushed down the prices of petrol and diesel.
After the covid-19 pandemic struck, the central government increased the excise duty on petrol and diesel dramatically in order to make up for the loss of other taxes. The excise duty on petrol went up from ₹19.98 per litre as of 13 March 2020 to ₹32.90 litre before the November cut. The increase in diesel was from ₹15.83 per litre to ₹31.80 per litre.
Given this, in 2020-21, the excise duty earned from the sale of petroleum products stood at ₹3.73 trillion, a significant jump from the ₹2.23 trillion collected in 2019-20. A bulk of this increase came from an increase in excise duty on petrol and diesel. Of course, the end consumers paid for this from their pockets.
The cut was made possible by the fact that the overall collection of taxes has improved this year, allowing the government greater flexibility on this front. Further, stability in diesel prices also ensures that the cost of moving things remains stable, thus helping the central government to keep a lid on the very high inflation figure as measured by the wholesale price index (WPI), which tends to seep into retail inflation or inflation as measured by the consumer price index. The WPI inflation in November had stood at 14.2%. It has been in double digits all through 2021-22.
In the past, whenever petrol and diesel prices have gone up, the central government has maintained that fuel prices are market-determined. But given that petrol and diesel prices have largely not moved since 4 November—the day the lower excise duty on petrol and diesel came into force—clearly the market argument is a convenient one. The average price of the Indian basket of crude oil was at $82.1 per barrel in October and $80.6 per barrel in November. On 4 January, it was at $77.9 per barrel. Despite the varying price of oil internationally, the price of petrol and diesel has remained constant.
Delhi is an exception to this, where petrol prices fell further from 2 December onwards after the state government cut the value-added tax on petrol from 30% to 19.4%. This pushed the price of petrol to ₹95.41 per litre from ₹103.97 per litre earlier. Political observers are of the view that the Aam Aadmi Party which currently governs Delhi was using this cut as a signal to potential voters in Punjab, where the party is a serious contender in the coming assembly elections.
The prevailing stable petrol-diesel price policy is being followed to create a sense of stability in prices in the minds of people and more importantly, potential voters who are undecided as yet on who to vote for. It is important to understand this point in a little more detail.
The government declares a monthly inflation figure as measured by the consumer price index, or what is more popularly referred to as retail inflation. To calculate this, the ministry of statistics and programme implementation keeps track of the prices of hundreds of products and services all across the country. This data is then used to come up with an inflation figure for the whole country and for different states as well.
In November 2021, retail inflation was at 4.91% all across the country. In Uttar Pradesh, it was at an almost similar—4.93%. In Uttarakhand, where assembly elections are also scheduled, it was slightly higher at 5.23%.
The average rate of inflation across the country helps government bodies like the Reserve Bank of India (RBI) to make policy decisions. However, people also have an intuitive feel for inflation, which might be different from the government’s declared rate of inflation.
Given this, there is also a sense of inflation as it exists in the minds of people or the perception people may have regarding how fast prices are rising. If they feel the prices of things that they buy regularly—like food, vegetables, fuels, clothes etc.—are going up, then inflation is going up in their minds.
Rising fuel prices contribute to this perception. And that’s not possibly a good thing for any politician who is looking to fight an election. Given this, politically, the management of the perception of inflation is as important as the management of actual inflation and that is something that the central government is doing by keeping petrol and diesel prices stable.
Similarly, the domestic LPG price has remained stable since 6 October despite the fact that the Saudi Contract Price—the benchmark for international prices of LPG—has moved up and down since then. This is again a move to manage the perception of inflation in the heads of people.
As the government said in a recent answer to a question raised in the Lok Sabha: “For domestic LPG, the government continues to modulate the effective price to the consumer to insulate the common man from rising international prices."
This has only been true in recent months, given that between 1 May 2020 and 6 October 2021, the price of domestic cooking gas for the end consumer went up by more than 50%. The upcoming state assembly elections seem to have forced the government’s hand on this front.
Import window for pulses
Inflation in the price of pulses is an important input in the creation of perception of inflation. While pulses inflation has stood at 7.7% between April and November 2021, it was at 17.8% during the same period in 2020. The import of moong dal was moved from restricted category to free category between 15 May and 31 October. Tur and urad were also moved into the free category between 15 May and 31 December. This has ensured that the pulses inflation has come down from May to November. In May, it was at 10%, whereas, in November, it stood at 3.2%.
Recently, the government decided to allow the import of tur, urad and moong up until 31 March. This means that the bill of lading for pulses being imported into the country must be for a period up to 31 March, whereas, the cargo can arrive at the Indian port any time before 30 June. This leeway in import is being offered despite the fact that the domestic production of pulses in 2021-22 is likely to remain stable.
As the central government said on 7 December while answering a question raised in the Lok Sabha: “As per (the) fourth advance estimate for 2021-22, the area covered under sowing of Kharif pulses is 135.2 lakh hectares which is almost (the) same as compared to last two years. As such, there is no adverse impact on the sowing of pulses." Clearly, the government doesn’t want to take any risks on the inflation front in a year where important assembly elections are scheduled. Hence, it has allowed room for imports.
GST and interest rates
The Goods and Services Tax (GST) Council has decided to postpone the increase in GST on textiles from 5% to 12%. This was supposed to kick in from 1 January. Several states including Gujarat had demanded that this increase be postponed. Gujarat is scheduled to go to the polls later this year. As The Hindu reported on this issue: “Textile dealers and traders had threatened to launch an indefinite strike against the hike in Surat." Surat is India’s largest textile hub. Gujarat is politically a very important state given that both Prime Minister Narendra Modi and Home Minister Amit Shah belong to the state. This move also helps in the management of the perception of inflation.
Political reasons are also at the heart of why the interest rate on small savings schemes continues to hold steady. On 31 December, the central government announced that the rate of interest on small savings schemes shall continue to remain the same even in an environment where the interest rate on bank fixed deposits (FDs)has come down dramatically.
Interestingly, on 31 March, the government had decided to dramatically reduce the interest rates on small savings schemes. The interest rate on the public provident fund (PPF) was reduced to 6.4% from the earlier 7.1% and that on the senior citizens’ savings scheme was reduced to 6.5% from 7.4%. On 1 April, the decision was suddenly reversed.
This primarily happened because of assembly elections in West Bengal. Data from the annual report on analysis of trends of small savings collection for the year 2017-18 (the latest available) shows that as far as gross collections under the small savings schemes are concerned, West Bengal comes in right at the top. In 2017-18, of the total gross collections of ₹5.96 trillion in small savings schemes, nearly ₹89,992 crore came from West Bengal.
And which state comes second? Uttar Pradesh—with a gross collection of around ₹69,661 crore. Gujarat, with collections of ₹48,645 crore, comes fourth. Elections are due in both Uttar Pradesh and Gujarat later this year.
This explains why the interest rate on small savings schemes continues to remain high. Also, the high-interest rates on small savings schemes go against the accommodative monetary policy of low-interest rates that the RBI is following in order to encourage investment and consumption.
To conclude, what all this tells us very clearly is that while maintaining the right monetary policy is important, winning elections is more important and the central government is doing whatever it can on the economic front to improve the poll prospects of the BJP. Or as economist Thomas Sowell writes in Knowledge and Decisions: “Parties formulate policy in order to win elections, rather than win elections in order to formulate policy." And in the weeks ahead, as Union Budget season approaches, there might just be a few more sweeteners.
Vivek Kaul is the author of Bad Money.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!