Household distress will delay recovery and now cut fuel taxes: SBI report



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India’s economic recovery could be delayed due to increasing financial pressure on households, and with inflation adding to their woes, a State Bank of India (SBI) report called to urgent reductions in fuel taxes, arguing that high oil prices not only spur inflation. but also force consumers to spend less on other items.

While retail price inflation moderated slightly from 6.3% in May to 6.26% in June, the SBI research note released Tuesday morning indicated that this was due to the casseroles, the tobacco and intoxicants, which fell to 4% from 10% in May, but food prices, especially protein sources like eggs, milk, legumes and oils and fats, are still rising. price.

“Oil and fat inflation reached 34.8% in June 21 from 30.9% in May 21, showing that the government’s basic import duties have reduced crude palm oil by 15% at 10% and refined palm oils at 37.5% from 45%. does not have much impact, ”said SBI group chief economic adviser Soumya Kanti Ghosh.

Rising transportation costs will eventually drive up consumer food inflation further, the report said, citing rising gasoline prices and shortages of regional truck drivers that push up road transportation costs as a result. even that ocean freight rates have increased several times since the onset of COVID-19.

The SBI expects crude oil prices to strengthen further following the cancellation of the recent OPEC + alliance meeting, estimating that every 10% increase in gasoline pump prices in Mumbai results in an increase of 0.50% of the consumer price index (CPI).

As rising crude oil prices pose challenges for the Union government as it tries to balance the need for additional revenue from high excise taxes with rising fuel inflation and its impact On headline inflation, the SBI said consumer trends in June indicate people are cutting back on spending on other goods to be able to afford higher fuel costs.

“In June… health spending fell dramatically, but oil spending more than supplanted spending on other non-discretionary items, like groceries and utilities, which was the trend in previous months, which is worrying. In fact, the share of non-discretionary spending rose to 75% in June from 62% in March, ”Ghosh said, citing an analysis of monthly credit card spending data from January 2020.

“This requires urgently reducing oil prices through fiscal rationalization, otherwise non-discretionary consumer spending will continue to be distorted and crowd out discretionary spending. This will also give an upward bias in inflation, ”he stressed.

Household distress increases

The second wave of COVID-19, which began in March 2021, coincided with a significant drop in bank deposits, according to SBI research, with the number of districts seeing deposit outflows nearly doubling from the first period of wave. Overall bank deposits in the first quarter of 2021-2022 were down 38% as of June 18, compared to deposit growth recorded during the April to June period of last year.

Household debt levels have also increased, so the recovery will be delayed as there is an indication of debt-financed consumption in India, Mr Ghosh said. Household debt as a percentage of GDP increased sharply to reach 37.3% or ₹ 73.6 lakh crore in 2020-2021, compared to 32.5% of GDP or ₹ 66.1 lakh crore in 2019-20.

“This indicates the level of household distress in India. The fact is also validated by the fall in financial savings. According to preliminary estimates from the RBI, the household financial savings rate in the third quarter of 2020-2021 fell to 8.2% of GDP from 21% and 10.4% in the previous two quarters. Interestingly, the savings rate in the United States rose to 34% of GDP in April from 8% in December 2019, ”the report pointed out.

“This indicates how much the recovery will be delayed in India relative to the United States, as we are primarily domestic consumption based on [economy], he concluded.

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