As the prices of everything from beans to medicine soar, retiree Philomena Amara has no doubt who is to blame: Indian Prime Minister Narendra Modi’s ruling Bharatiya Janata Party.
“They are minting money, thinking only of themselves,” the 70-year-old raged as she scoured the Mumbai market for the cheapest options.
The poor in India are already the hardest hit by the country’s strict measures to contain the coronavirus pandemic. Now, they are bearing the brunt of rising food costs as Russia’s war against Ukraine causes commodity prices to skyrocket around the world.
For the Modi government, the stakes could not be higher. Controlling inflation is crucial in a country where the price of onions can allegedly decide elections, as it did in 1980 when former prime minister Indira Gandhi won after her rival oversaw a spike in the price of the vegetable.
Headline inflation in India reached an eight-year high of 7.79 percent in April compared to a year earlier, before slightly decreasing to 7.04 percent in May. But it remains above the upper end of the central bank’s 6 percent target range, and vegetable costs continued to rise in May, rising 18.26 percent year-on-year.
“We see upside risks from food inflation,” Goldman Sachs said in a research note.
In response, Modi’s government cut fuel taxes, while the Reserve Bank of India began raising interest rates for the first time in nearly four years. But those efforts came too late to prevent further price rises, analysts said.
“I think the RBI was a bit complacent and so was the government. The focus was just on him [economic] growth,” said Shumita Deveshwar, senior director of India research at TS Lombard.
The rise in inflation coincided with the withdrawal of pandemic-era central bank aid measures and a heat wave that hit India’s wheat crop.
The RBI cut its gross domestic product growth forecast for the year ending March 2023 to 7.2 percent, down from 7.8 percent in February.
In response to rising food prices and crop damage, New Delhi has restricted wheat exports and announced a cap on sugar shipments, as well as cooking gas subsidies for low-income households.
The government’s cut in excise duty on petrol and diesel should directly ease inflation by 0.2 percentage points and indirectly by 0.5 percentage points, according to HSBC.
But the fiscal cost of the fuel tax cut is high – HSBC estimates Rs1tn ($13bn) in lost government revenue. New Delhi also said it would help farmers by doubling fertilizer subsidies, adding to the burden on government finances.
All in all, economists estimate that the new fiscal measures will cost the state 2 trillion dinars — which is equivalent to at least 0.5 percent of GDP.
For the government, “it’s definitely a difficult balance right now,” said Sonal Varma, Nomura’s chief economist for Asia excluding Japan.
It comes on top of Finance Minister Nirmala Sitharaman’s budget in February, which aimed to increase capital expenditure by a third to about $100 billion through infrastructure spending.
Sanjiv Bajaj, president of the Confederation of Indian Industry, one of the country’s largest business associations, said the government and the RBI were approaching inflation in a “hands-on” way. “You don’t want to kill the golden goose that lays the eggs, so they have to balance growth with inflation,” Bajaj said.
But half of respondents to a recent CII survey cited rising import costs as a concern after the rupee hit a series of record lows against the dollar this year.
The biggest problems facing the Indian industry were “inflation and international uncertainty,” Bajaj said.
But support for the BJP has held despite a history of extreme price sensitivity among voters, said Neerja Chowdhury, a political commentator in New Delhi.
A combination of Hindu nationalist rhetoric and the ruling party’s strong emphasis on welfare benefits has helped boost its popularity despite the economic shock of the pandemic. The BJP has swept a number of state elections this year.
But she added: “There is a limit to people’s tolerance. Consequently [the government] reduce gasoline duties. A lot depends on how he handles the situation.”
There are signs that some voters, like Amara, who is already cutting back on her vegetable purchases, have had enough. They feel that the government has abandoned them, a feeling that threatens to grow with the onset of the monsoon season, which even at a time of low inflation usually leads to higher food prices.
“This is all because of the politicians,” Amara said. “[They are not even] looking at price increases.”