I had given my findings about causes of inflation in our country's economics in my previous post where I showed effects of “use and throw”, policy as against “repair”, policy. Here I am giving one another cause for inflation. We often discuss usually known causes of inflation but I want to attract attention to other causes not much discussed but they do matter. In this post I want to highlight effects of various taxes levied by many public bodies such as central government, state governments, local bodies such as municipalities and Jilha parishadas.

In one recent talk with media our governor of RBI expressed need to curb inflation but I do not think that is possible for RBI to achieve without some additional powers to that Bank. Generally, we observe that a surge of inflationary moment begins after every budgetary provision declared at the time of budget session. We see central government, state government, local bodies such as municipal corporations, Jilha parishads and more give out their budgets and at that time they announce some additional taxes on various commodities and services. As soon as that happens we see a spate of rising prices of commodities or services whatever is affected by those additional taxes. This process causes a continuous inflationary effect on the market.

Today Reserve Bank of India does not have any control on this process of issuing budgets by these public bodies. If RBI has power to inspect these taxes by provision of some act in the parliament by which no budget can be executed unless it is approved by RBI. RBI can effectively control inflation. Such an act shall provide a third party check on all budgets in India. Arbitrary misuse of power to issue budgets with unjustified taxes will be checked by that act.

When taxes are applied to commodities or services the purpose of that is not limited to earning additional revenue but along with that some other intentions are included with that. Primarily, some taxes are introduced to bring control on the activity of that commodity or services. Some taxes are applied to discourage people from buying those things and by that reduce its consumption. This type of tax is generally used where a straight ban on the product is not possible. By making that product expensive it is contemplated that people will not purchase that, notable in this type are all taxes on tobacco products. Some taxes are introduced to help vested interests of politically influential persons or companies so that their competitor will not be able to compete with them. We see a good number of taxes introduced by these public bodies those are actually not required. People are pressed to pay them and there is no authority to control this malpractice. All these essential as well as non essential taxes add to inflationary effect. For example, Mumbai Municipal corporation has declared that water bill charges will be enhanced at the rate of 8% per year ad hoc; this is not according to any acceptable reason and so cannot be considered as essential. In such cases RBI will demand to know explanation for such arbitrary rate and on finding it to be wrong shall abolish it. There are many such wrong taxes culminating into more of robbery than decent taxes. Other example will be of toll taxes levied on vehicles plying on roads. Present toll collected by private companies is nothing but a legalized highwayman-ship. There is no acceptable explanation to justify these taxes. All these illigal taxes those actually amount to robbery rather than taxes shall be removed by RBI and that will help control inflation.

In addition to taxes we see that prices of vital commodities such as power and mineral oils are frequently increased. RBI has no control on such changes. Every time prices of such commodities change we experience that causes inflation in the market. The sprawling effect of such increases in prices are not controlled by RBI. Other commodities such as basic food also add to that. I suggest that this price control also should come under RBI under this act. Today as there is no control on any body while declaring prices we see prices growing in the most irresponsible manner. The so called experts who claim to be deciding these increases in prices will be questioned by RBI economists and that will be a Deterrent to them. Today there is no sensible answerability in them, that will change and these so called experts will know that they have to be careful while deciding on prices.

Without such an act giving power to RBI, this situation continues whatever measures RBI takes to control prices are not going to be of any sensible effect. In this context I request governor of RBI to convince the coming new government that an act be passed so that all prices and taxes levied by these authorities are approved by the Bank before they are implemented. Without prior approval of RBI no tax and increase in prices will be applicable.

While controlling these additions of taxes and prices, RBI will see to that they do not cause any undue inflationary effect on the market. This measure shall bring some amount of check on the concerned bodies and they will have to convince RBI during the inspection that the taxes they have levied and increase they have introduced are not inflationary. Any unnecessary addition to satisfy vested interests and such Illegitimate causes will be rejected by the RBI. This will bring about some control on these unruly and over confident agencies. If such an arrangement is not possible I am sure any amount of efforts RBI puts to control inflation will not succeed.

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