Make the connection

Panic is inflationary now in the government because inflation is now breaching the political tolerance level. But more sober heads must make better connections. First, taxes and inflation. This government, it is fair to say, suffers from fiscal greed. Take service taxes. Since they have proved to be a big earner, service tax rates have been on a rise. Or take customs and excise duties on fuel. There have been arguments for years now that oil duties should be lowered, that they form a big chunk of the price component. But the finance ministry has never agreed. Remember the argument by the finance ministry that the effective tax rates of corporates have increased. Clearly, the higher effective tax, subject to the nature of the competition, is being passed on to consumers. Corporates tax compliance in any case has been complicated by badly designed imposts like the fringe benefit tax (FBT). At the level of states, VAT is obviously a good change, but many VAT rates are high and, again, being passed on.

Therefore, to talk about inflation and not talk about taxes won’t wash and won’t help. The ideal reform in indirect taxes — a transparent, no-exemptions, simple system that quickly becomes a unified goods and service tax — becomes even more crucial in an inflationary context. Governments can’t tax simply on the principle of grabbing maximum revenue in an ad hoc fashion. All the talk of reducing import duties now is also ad hoc.

Customs duties should have been coming down faster anyway. Products that can be freely imported attract high duties. And products that require canalised imports can’t be supplied quickly enough to smother prices.

The other connection that should be made is between prices and unorganised middlemen. This bout of inflation is being driven by primary commodities. Forward trading hasn’t contributed to this — the commodities taken off the bourses had very small trading volumes. What has happened and is happening is the lack of disintermediation — between farmers and markets are middlemen whose profit calculations have a disproportionate effect on final prices. America took care of this problem in the 1920s, and food prices have been historically low since then. Here, lack of clear thinking is a problem. Another perhaps is that agro intermediaries are typically generous political contributors.