This column is based on ideas deliberated in the International Economics Association (IEA) conference held at Medellin, Colombia from 11th-16th December. See details on IEA here.
How can inflation levels persistently remain high in a country when the consumption demand level amongst different income groups has remained low for a longer duration?
This was the question raised to Economist Isabella M. Weber, recently listed in the Times100 list of most influential people, during the ongoing International Economic Association (IEA) summit.
Weber’s work in the US and EU context has explained ‘price gouging’, anchored by corporate greed, as a vital causative factor influencing higher (inflationary) prices across sectors-calling this seller’s inflation.
Companies, particularly in oligopolistic market conditions (markets where few firms/corporate companies control the market share of a commodity) tend to keep prices high to earn abnormal profits, especially in times of conflict, crisis or emergencies, and ‘greed’ underlines the motivation for artificially producing inflation, acting as a tax on the most vulnerable and poor.
Is this true for all inflationary expectations/trends being observed across the globe now? Weber and other experts studying recent inflationary trends from a supply-side perspective agree.
When oil companies were making abnormal profits from volatile oil prices in Europe, one of the measures adopted by the European Union was to impose a windfall profit tax on the energy providers – to correct the abnormal rise of incomes experienced by such companies and give relief to the consumers.
Fuel price-anchored supply-side inflation cascades into higher food-price inflation (particularly in developing countries like India), as explained by this author in a recent study.
In the Indian scenario though, instead of imposing any windfall profit tax on profiteering firms, the Narendra Modi government did the opposite by closely colluding with oil companies to profit from any potential gains made from cheaper oil imports (from Russia).
India’s own tryst with ‘seller’s inflation’
Food prices in India have remained high for a few years now. Much of this is usually explained by seasonal, distributive factors where agri-based pricing mechanisms are influenced by a volatile monsoon trend and an urban consumer bias often results in higher food inflation trends. However, the longevity of this wave of food inflation-supported by high fuel prices and retail firm-based price gouging – in a weak urban and rural consumption demand environment – has evidence from Isabella’s seller’s inflation theory.
Since the BJP came into power, India has seen its import demand for oil grow steadily, with the import of crude oil and other petroleum products nearly tripling in volume between 2014 and 2022. This growing demand for energy has also been observed in the composition of merchandise imports between the same range, with imports of oil products nearly doubling in value from Rs 78,281 crores in April 2014 to Rs. 168,226 crores in July 2022. See below.
Source: CNES-InfoSphere
While this rising import bill may present an issue for any government, through imposing taxes, the government has been able to contain the prices of oil products such as petrol and diesel in a narrow band. The avenue of tax component in the prices of motor spirits has been a major source of revenue for the Union government. Taxes on oil and petroleum products form a major part of the retail prices borne by the consumers.
Source: CNES-InfoSphere
The Union government keeps a fixed rate of excise duties on the base price of petrol and diesel, which has contributed to an increasing dependence on the revenues from such duties. Of the total tax contribution from the petroleum sector to the Exchequer, excise duties levied from petrol and diesel have accounted for nearly 75-90% in the last 10 years (for state governments, VAT from petrol and diesel has accounted for 85-95% during the same period).
Source: CNES-InfoSphere
Source: CNES-InfoSphere
Weber argues that such acts of keeping prices higher for higher profitability aren’t unique to the Indian scenario. The US too has seen it in the last few years and so have other countries in Europe, where market power is unevenly tilted in favour of a ‘few’ companies. Pre-existing inequities in market conditions have incentivised price gouging across sectors -from oil to retail.
Companies use ‘emergencies’ or ‘external price shocks’ to push prices up that cannot be explained by demand or supply side factors. In India, if you see the figure below, much of the consuming income class has seen a shrinkage in net incomes over the past few years, which caused a regressive, downward turn in demand.
From any basic Keynesian logic, it would be baffling to see macro prices for goods and commodities and then see a higher price trend when macro demand is weak. This has been true since the pandemic particularly, which Weber’s work highlights.
Fuel-anchored food inflation tax in India
As prices of petrol and diesel have hovered around Rs 100 despite the cut in excise duties, it remains to be seen how the oncoming production cut will be managed by the government.
Source: CNES-InfoSphere
Leading up to the general elections of 2024, OPEC’s decision to cut production would certainly not bode well for the government’s fuel import bill. Also, with the dollar exchange rate already at a record high despite RBI intervention, and inflation already high, the incoming rise in fuel costs is surely expected to add to the fire.
The spinoff in the narrative projected by the Modi government in managing the headline-fuel inflation is also interesting. It first allows the price of retail petrol and diesel, much like LPG, to scale up – citing ‘external factors and geopolitical concerns’ while allowing the government to beef up revenue and oil companies to make abnormal profits, and then lowers them marginally – closer to the election cycle-citing gratitude to the efforts of the prime minister.
Observing through the fog of this disinformation, cloaking the truth behind what’s happening to fuel and subsequently to seller’s inflation in India is critical.
See below the P/L levels of major OMCs
Source: CNES-InfoSphere
From meeting rock bottom post-2022, companies recorded profits consistently from thereon. If we see the nature of the relationship between headline inflation and crude oil price, in the figure below, one will see how between the period of 2018 and early 2023, inflation remained high despite a gap in oil prices.
Source: CNES-InfoSphere
Yes, in many countries, as Weber and other economists discuss, supply-side disruptions majorly contributed to the initial rise in price, but if one looks closely in context to India alone, sustained high fuel prices – because of high tax/cess and the government’s failure to pass on the benefit of lower import cost (when crude oil price was low), had a double cascading effect on firm-level transport costs, leading to a higher cost-push inflation in CPI-from which most companies (not just OMCs) profited at the expense of the poor. The chart below provides a mapping between CPI-Oil price numbers across major cities – engines of urban growth – across India.
There is a strong case for the government and particularly the opposition to recognise how the Modi government and its allied group of companies profited at the cost of the poor by imposing an ‘inflation tax’. This was not just motivated by corporate greed in the private sector, but collusively supported by profit-seeking, incumbent government that did nothing to recognize this.
Now, amidst a bad agricultural harvest season and rising protectionism across the globe, as input prices go up and food inflation (with prices of wheat, pulses, cereals etc.) is also likely to remain higher with a combined weight of other distributive ‘supply side’ reasons playing a role too. Standard monetary policy toolkit measures will not be able to address these concerns unless the government is made to recognise its folly, and perhaps be strongly nudged into using fiscal policy instruments to keep inflationary food prices low (while disincentivising corporate companies to pursue the practice of ‘greedflation’). This is especially needed when consumption demand and income growth are weak and the employment rate in the organised sectors is at its worst for those entering the workforce.
Deepanshu Mohan is professor of economics and director, Centre for New Economics Studies, Jindal School of Liberal Arts and Humanities, OP Jindal Global University.
