Are we heading for 'India Shining' moment?

Who buys petrol and diesel in India? “Somebody who has a car, bike; somebody who can afford to pay has to pay." This is how Alphons Kannanthanam, Minister of State for Tourism, recently defended the rising fuel prices in the country. The bold strategy by the government to play Robin Hood by squeezing the middle-class to cross-subsidise the poor may make reasonable economic sense as India tops the list of World Bank with the largest number of people living under the international $1.90-a-day poverty line, accounting for one in three of the total poor population worldwide. But it has the potential to turn into a political hara-kiri, a rerun of the 'India Shining' debacle of 2004. The NDA government that rode to power on the promise of bringing down prices in 2014 is staring at the steadily-increasing inflation, rebounding from the record low.

The strategy to keep diesel-petrol prices high for larger excise revenue mop-up is leading to price spurts in food and transportation sectors. Retail inflation rose 100 basis points to 3.4% in August from 2.4% in July, marking the second month of ascend, while wholesale inflation accelerated to a four-month high of 3.24% on the back of rising food and fuel prices. If the government decides against slashing diesel-petrol prices, food and transportation inflation may push retail inflation beyond 4%, the comfort zone of the Reserve Bank of India (RBI), by November-December.

The fears over rising inflation will flummox the central bank and surely, delay the rate cut despite mounting signs of an economic growth slump.

Even after seven decades of Independence, the RBI is scared of onions and tomatoes. As onion prices moved up, income-tax raids are currently underway on large farmers and stockists across Nashik district in Maharashtra, a leading producer of onion. In response, traders have lodged a massive protest by shutting down the Lasalgaon market. Farmers allege that the government was conspicuous by its absence when prices fell to a slice of the cost of production of Rs 5 a kg early this year. In June, farmers from Madhya Pradesh went on a rampage (at least five of them died in police firing) after they were forced to sell onion at for Rs 2 to 3 per kg.

The government may be running out of options. To spur economic growth, it may be forced to increase spending, putting at the risk its Budget deficit target. It may also force the RBI to cut interest rates. But the fact is that banks have refused to cut lending rates 45 days after the RBI cut repo rate by 25 basis points on August 2.

There are concerns on other economic fronts too. Despite a 10% growth in exports amid GST-related initial jitters, India’s current account deficit (CAD), the difference between imports and exports, soared to a four-year high of $14.3 billion during April-June quarter, making it 2.4% of GDP, from 0.1% a year ago and 0.6% in the fourth quarter. The rise in CAD stemmed from a high trade deficit of $41.2 billion during the quarter, thanks to a larger increase in merchandise imports relative to exports. The massive jump in foreign exchange reserves to $400 billion (which comfortably covers India’s annual import bill) is definitely good news, but it owes to the transient capital flows, and not the trade surplus.

The writer is editor, DNA Money. He tweets at @AntoJoseph