Inflation is BJP's biggest political problem, making voters sullen

Budget 2022 needs to change opinion in the country, if only to divert attention from unemployment and inflation.

Is unemployment the BJP’s bigger problem or inflation? What should the Budget focus on?

I’d say inflation. True, it isn’t at the blistering levels of 2012 and 2013 yet. But it could get there. 

Indeed, it doesn’t need to be at those levels because the pandemic has already done so much damage to people’s incomes. Inflation at even half the rate of 2012-2014, of about 15 percent, is hurting immensely. If it goes up, as it looks like doing, it will hurt even more. 

The IMF, in its latest World Economic Outlook (WEO) released on January 25, has said that “elevated inflation is expected to persist for longer than envisioned in the October WEO, with ongoing supply chain disruptions and high energy prices continuing in 2022.” This applies to India as well. 

Just see what’s happened and is happening here to food and energy which make up nearly a quarter of monthly family expenses. Since March 2020 the price of diesel has increased by 35 percent, and by about 77 percent since 2014. But incomes have fallen. 

Likewise, since March 2020 food prices as measured by the Consumer Price Index, increased 13 percent. But don’t forget: this is an aggregate number which is of no consequence politically because the spot prices are far higher. 

Thus, vegetables cost anything from 50 to 100 percent more, depending on the city or town. The same is true of fruits. Milk, too, is now nearly 25 percent more expensive than a year ago. 

Cooking oil prices have increased more than 40 percent, and pulses became at least 20 percent costlier (and probably much more in some areas). 

The government cannot also order the RBI to increase interest rates or otherwise tighten liquidity conditions because conventional wisdom says those are its major tools to encourage growth. 

So the government is relying on cheap Chinese imports to control wage goods inflation. Imports from China, therefore, stood at $65.2 billion in 2020-21, about the same as in the previous year. This financial year they are already $59 billion as of November 2021, with four months left in the year. 

Here let me add two asides. 

One, the Chinese government says its exports to India have touched $97.52 billion 2021. The difference is because while China takes Hong Kong as China, India counts imports from it separately. 

Two, higher imports are translating into higher IGST which suits the government because with domestic industry slow to revive, GST revenue has been below par. 

Be that as it may, the political point is that persistent food inflation is affecting the mood of the voter. He and she are both sullen. 

It’s no use telling them it’s because of higher crude oil prices and higher freight costs or that the geopolitical situation has worsened or that there aren’t enough containers or that the rupee is depreciating. 

The exchange rate, by the way, stood at about Rs 59 per dollar in May 2014. It is now about Rs 75 per dollar. This has helped exports but added to wage-goods inflation. 

The Budget needs to change the mood in the country, if only to divert attention from unemployment and inflation. 

Short of a major reduction in income tax rates, there’s nothing the Finance Minister will be able to announce that will change the middle class mood — lower, middle and upper. 

These people are small in number but hugely important in determining the overall political mood. Recall how they have twice brought the BJP absolute majorities. 

But should taxes be reduced now or in the Budget of 2024? It’s a tough choice. 

And therein lies the true danger for the BJP. It is running out of tricks.