​Bursting at the seams: On the rise in inflation

Political & Constitutional Dimensions:

From the government's perspective, the response has been calibrated to manage both inflationary expectations and electoral pressures. Prime Minister Modi's appeal for reduced spending on weddings, international travel, and precious metals represents an unprecedented public appeal for consumption restraint — a politically sensitive move that acknowledges the severity of the situation without direct price controls. The doubling of gold and silver import duties serves dual purposes: reducing safe-haven demand that contributes to import pressure, and signalling the government's intent to conserve foreign exchange reserves.

The opposition and critics argue that this approach is inadequate. The reliance on appeals rather than direct intervention in fuel pricing suggests the government is hesitant to pass on costs to consumers ahead of potential state elections. The constitutional dimension here relates to the federal structure — fuel pricing involves both the Centre (excise duties) and states (VAT), with the Centre's excise collections on fuels having risen substantially in recent years. Critics argue this represents a structural burden being borne disproportionately by the common consumer while oil marketing companies absorb losses that ultimately impact PSU balance sheets.

Economic & Financial Impact:

The economic implications are substantial and multi-layered. The ₹30,000 crore monthly under-recovery being absorbed by public sector oil marketing companies represents a fiscal burden of approximately ₹3.6 lakh crore annually — a significant sum that affects PSU bank balances and sovereign borrowing requirements. [Source]

The sharp WPI-CPI divergence (8.3% vs 3.48%) indicates a classic "price compression" scenario where manufacturers and traders are absorbing input cost increases rather than passing them through immediately. This is unsustainable and creates a latent inflationary potential. When these costs are eventually passed on — as indicated by the likely fuel price hike — retail inflation could breach the 6% upper band, forcing RBI's hand on monetary tightening.

The rupee's 8.5% depreciation in just 2.5 months has wide-ranging implications. It makes imports more expensive, directly contributing to inflationary pressure through higher import costs for petroleum, edible oils, and raw materials. It also increases the real burden of external debt servicing. The doubling of gold and silver duties is an attempt to reduce import demand, but gold imports typically remain resilient during geopolitical uncertainty as a safe-haven asset.

Social Dimensions:

The social impact is most acute on the urban poor and migrant labour. The 5 kg LPG canister — extensively used by migrant wage labour for cooking — has seen increases of over ₹200, directly affecting food preparation costs for some of India's most vulnerable workers. [Source] The increase in commercial LPG prices is also reflected in restaurant and accommodation costs (among the sharper increases in the CPI basket), indicating cascading effects on low-cost food services.

The Prime Minister's appeal to reduce spending on weddings and travel abroad seems tone-deaf to families already struggling with rising fuel and food costs. Critics argue that such appeals place the burden of macroeconomic adjustment on individual consumption choices rather than addressing structural policy failures. The impact is regressive — the poor spend a higher proportion of income on food and fuel, making them disproportionately affected by these price increases.

Governance & Administrative Aspects:

The policy space for both the government and RBI has become severely constrained. The government cannot easily increase fuel prices without risking inflation, but continuing to absorb under-recoveries is fiscally unsustainable and affects PSU banks' capital positions. The RBI faces the classic trilemma: controlling inflation requires rate hikes, but higher rates could dampen growth recovery and increase borrowing costs for stressed sectors.

The implementation of fuel price increases faces administrative complexity. State governments levy VAT on fuels, and any Centre-controlled retail price revision interacts with state revenue calculations. The GST Council, which theoretically could bring fuel under GST to simplify taxation, has not done so, leaving the complex multi-layered tax structure intact. [GK]

International Perspective:

The current inflation dynamics are part of a global phenomenon triggered by the Iran conflict disrupting crude oil supply routes. [Source] Unlike the 1970s oil shocks when India could partially insulated through licensing, current WTO commitments and integration with global markets mean India is more exposed to international price transmission. [GK] The comparison with other emerging economies reveals that India's 8.5% rupee depreciation is steeper than many peers, reflecting both the specific geopolitical exposure and accumulated macroeconomic vulnerabilities. Central banks globally face similar tightening dilemmas, with the U.S. Federal Reserve also navigating between inflation and growth concerns. [GK] The International Monetary Fund's surveillance of emerging market economies suggests that countries with current account deficits and high fuel import dependence face acute vulnerability in such scenarios.