Two members of the RBI’s rate-setting panel flag GST hike as upside risk to inflation
India’s retail inflation may be moderating after hitting a peak in April but there are some upside risks that will weigh on the RBI’s mind as it decides the course of future rate hikes.
Apart from the geopolitical risks and the volatile nature of commodities and uneven nature of rains, two MPC members pointed towards the recent hike in GST tax as near term risk to retail inflation.
External members of the Monetary Policy Committee, Ashima Goyal and Shashanka Bhide, underlined the recent hike in GST tax on some of the consumer-centric items as a source of upside risk to inflation.
“Some rise in GST tax rates, electricity tariffs, energy costs and rupee depreciation, although the rupee is showing signs of mean reversion towards real equilibrium values, are short-term risks for inflation,” Goyal said.
Bhide said that the upside risks to inflation remain significant despite easing of energy prices and other raw materials. An uneven southwest monsoon with deficiency in the eastern region and the crop prospects could determine the trajectory of food inflation going forward, Bhide highlighted.
“On the domestic front, inflationary pressures exerted by the rising input prices are continuing. The impact of recent changes to GST rates, somewhat uneven distribution of the southwest monsoon rainfall with deficiency in the eastern region of the country, could be source of upward pressure on prices.”
The move to hike GST at a time when the inflation is surging came under criticism from the opposition during the discussion over price rise in the just concluded Parliament session.
Finance minister Nirmala Sitharaman clarified that the levy of GST on items such as rice, wheat flour and curd was taken after agreement among all states. She added that such a levy pre-existed on one or the other daily essentials in 22 states.
She also pointed towards the fact that some of the items had a higher tax before the GST came into effect.
The GST Council, in its 47th meeting, had withdrawn exemptions on some pre-packaged food items like rice, wheat flour, curd, lassi. However, the exemptions will continue on packs sold loosely. Hospital room rents which are above Rs 5,000 also came under the GST ambit.
Retail inflation for the month of July eased to 6.7% driven down mainly by softening food prices. The RBI hiked repo rate by 50 basis points in its August policy review taking it to 5.4%. The RBI has hiked the rates by 140 basis points since May taking the repo rate to above the pre-pandemic level.
