Most macroeconomic indicators are showing a positive trajectory. A primary one is inflation which has come down substantially over the last few months.

The consumer price index (CPI) has fallen from a high of 28.8 percent in January to 4.9 percent in November. In September 2023, the CPI clocked at 31.4 percent. The sensitive price index (SPI) for the week ending 5 December 2024 was 3.57 percent year on year, a steep decline from the average annual July-November for the past two years at 30.8 percent in 2023-24 and 28.30 percent in 2022-23. However, core inflation (non-food and non-energy) declined only moderately – from 18.6 percent in December 2023 to 8.9 percent in November 2024. It may be mentioned here that the CPI determines inflation by calculating prices of a fixed basket of goods while core inflation removes CPI components that exhibit a large amount of volatility from month to month.

There are a number of factors behind the declining trend in inflation, including the improving rupee-dollar parity and the policy rate cut. There is also a pause in imported inflation because of the dampened level of oil prices of a little more than $70 per barrel which, in turn, has resulted from a dull consumption demand due to geopolitical tensions and slowdown in China. But experts point out that the external situation may change at any time, especially due to the developments in the US and the Middle East. Again, the drastic fall in policy rate is likely to boost economic activity which will in turn reverse the deflationary trend. Further, since OPEC has not increased production, oil prices may bounce back, impacting electricity tariffs which contribute to inflationary build-up. Also, one has to keep in mind that such factors as hoarding and price sharking also negatively affect inflation.

The SPI, which gives a more accurate picture in terms of increase in prices of commodities of essential nature and which has the most impact on everyday life of the common man, remained in double digits all through January to August – falling from a high of 36.2 percent in January to 10.8 percent in August. But since September it has moved into the single digit zone, and for November stood at more than the CPI at 7.3 percent.

But It is apprehended that any disruption in the supply chain of agricultural commodities and implementation of IMF-dictated harsh taxation measures in coming months may result in cost-push inflation. Since much of the inflationary pressure stems from external factors, a home grown strategy is needed to contain inflation in the long term. Instead of seeking loans from the IMF and other financial institutions, we should depend more on indigenous revenue sources and increase collections from those with the ability to pay rather than from indirect taxes whose incidence on the poor is greater than on the rich. As of now, the IMF-approved budget places more reliance on indirect taxes — 75 to 80 percent of total collections.

This is the main reason why the positive impact of the CPI and SPI reduction has not been felt at the grassroots level. The need is to accelerate efforts to collect more direct taxes from the rich both in the urban and rural areas. At the same time, steps should be taken to curtail current expenditure which was illogically raised by 21 percent for the current year. The situation demands that overdue structural reforms should no longer be delayed, including putting a lid on public sector borrowing demands through fiscal consolidation. The state should gradually withdraw from the ownership of financial institutions. The need for government borrowing can be met by selling state-owned entities at the earliest possible.

Good governance is the need of the hour and must be promoted at all levels to increase efficiency and productive capacity of those responsible for service delivery. Our government departments are known for their proclivity to overspend and waste precious resources. This should be strictly discouraged with a comprehensive belt tightening regime at all tiers of the government, both at the federal and provincial levels. The royal perks and privileges of higher bureaucracy, including free petrol and electricity as well as free travel, should be abolished forthwith.

A heavy drain on the national exchequer is the package of open and hidden subsidies allowed to members of the ruling elite. These subsidies running into tens of billions of rupees annually are among the factors leading this country towards ever-rising indebtedness. More taxes should be collected from the wealthy so that resources can be diverted towards agriculture which forms the backbone of the economy and incentivising manufacturing and export-oriented industries. This is the only sure way to fight the bugbear of inflation in the long run.