Home > Archives (2006 on) > 2008 > May 24, 2008 > Current Inflation: Deconstructing the Underlying Social Factors

Mainstream, Vol. XLVI, No 23

Current Inflation: Deconstructing the Underlying Social Factors

Thursday 29 May 2008, by Arun Kumar

Introduction: Why Unanticipated?

Inflation is suddenly big international news. Till the other day, in the Economic Survey in February end and the RBI quarterly report in January, there was no indication that we were facing an impending sharp rise in the rate of inflation. “Overall inflation is likely to remain moderate in coming months, as the policy measures taken during the course of the year work their way through the system.” (Economic Survey, 2007-08, para 4.65, p. 84)) “These measures have supplemented the various pre-emptive monetary measures undertaken by the Reserve Bank since mid-2004 and helped in containing inflationary expectations.” (RBI Macroeconomic and Monetary Developments: Third Quarter Review, January 29, 2008, p.56)

Is this surprising, given that important functionaries in the government act like salespersons constantly praising their products and hiding its flaws? The FM giving a spin was happy to note that the inflation rate is stable at 7.5 per cent. The PM, on return from Bhutan, admitted that inflation is a problem but advised his countrymen to have patience and hope for a good monsoon. Is that the assurance the country needed? The credibility of senior functionaries is being eroded and that dilutes the policy- making powers.
The PM, FM, Chairperson of the Advisory Council to the PM, etc. have said that inflation would soon be brought under check but the public seems unconvinced, even if that actually turns out to be true in, say, six months time. The rate of inflation coming down means prices still rise but less fast. It is like a bus that is reducing its speed (decelerating) but still moving ahead.

So, lowering of the inflation rate means prices still rise and do not fall.
The government has taken a slew of steps to control inflation but these seem to have had little impact as yet. These relate to export duties to reduce exports of foodgrains, lower import duties to bring down domestic prices, curbs on forward trading, announcement of expected bumper harvest and increase in procurement. All these are expected to slow down inflationary expectations.

Blame is sought to be put on external factors like the worldwide food shortage and the rise in energy prices globally. Indeed, international prices of food and petro-products have risen rapidly in the last few years and more specifically in the last one year. Why has all this become apparent to policy-makers only in the last two months when the inflation rate suddenly went up? Why could this not have been anticipated given the international trends? Is our leadership so short-sighted that it cannot foresee what is about to happen a few months from now? If that is the truth, how can the public trust the prediction that the steps now taken will succeed in curbing the rising inflation? There is a clear contradiction.

Perceptions about Inflation

IT is argued that the rate of inflation in India is not high compared to, say, what it is in other countries, like, Zimbabwe, China, Russia or South Africa. Several things need to be understood as to why at even low levels of inflation, political tempers begin to rise in India. First, since a substantial number of people live in extreme poverty (below the poverty line) in the country and these people have no indexation for inflation or any kind of social security, they face a crisis in their lives even with a moderate increase in prices, especially when these happen to be food prices. In 2004-05, they spent more than 65 per cent of their monthly bill on food. Even this was inadequate to give them adequate calories; so any further squeeze in this becomes unbearable.

Secondly, not only the extremely poor but those who are just poor, live at less than Rs 20 per capita per day, and constitute 77 per cent of the population (according to the Unorganised Commission Report), find any rise in food prices hurtful (they spend more than 60 per cent of their budget on food). In a consumerist society where demonstration effect is strong, many amongst these aspire to buy goods other than the most basic. They cut their basic requirements to do so. However, when essential goods prices rise, they see their aspirations evaporating and their dissatisfaction rises—they have already cut their essential goods consumption to the bone and cannot cut it any further.

Thirdly, the farmers would benefit from the food price increase. However, usually they are not the ones getting the major share of the increased price of food because only the well-off amongst them have the holding power. Many of them are indebted and have committed to supply their crop at given prices to the local traders and lenders. It is often noticed that the price received by the farmer for the produce at the farm or even in the mandi may be a fraction of what it sells for in the urban consuming centres. Then, of course, there are the large numbers of marginal farmers who go to the market to buy a large chunk of their requirements. Unambiguously, only the rich farmers benefit from the food price rise. For the rest in agriculture, there is a gradation of loss.

Fourthly, the middle classes, aspiring to consume beyond their not inconsiderable means, feel aggrieved. The upwardly mobile are in debt so that as prices rise, they need to borrow more and are squeezed by larger installments of payments, and hence feel unhappy.

Services Sector Not Included in Inflation Figures

FIFTHLY, and critically, the government announced inflation rate does not represent the true effect of the price rise. As discussed in the Alternative Economic Survey, 2006-07, the Services sector is grossly under- represented in the various measures of inflation—wholesale or consumer price indices. The well-off sections are consuming more and more of services and their prices are rising fast (like, for education and health or tourism) or new services are being added to the consumption bundle (like, internet and mobile phones) leaving less for spending on what was previously being consumed. Thus, family budgets are under greater strain causing dissatisfaction even among the well-off.

Imagine, there was a time, when there were no malls to go to and do impulsive buying. There were no credit cards that allow one to buy even if one’s pockets are empty. Earlier there were no Baristas or Café Coffee Day to go and spend Rs 30 or more on a coffee. A tea in a dhaba at Rs 3 was the cup that cheered. One went to an IIM at Rs 4000 per annum and not the current Rs 5 lakhs per annum at IIM-A. A hotel room at Rs 1000 per night has gone up to Rs 5000 per night. A visit to a movie by the kids has risen steeply by five times. Earlier a smaller per cent of the population had asthma or cancer or diabetes or blood pressure and, worse, the treatment for all these has become hugely expensive with the ongoing privatisation of health care. Earlier in a middle class home there was one land line, now there are perhaps an additional two-to-three cell phones with family members so that bills have mounted even if the unit cost of the call has come down. Electricity rates are much higher and so are bus and auto fares. None of this gets counted in the inflation index. Thus, family budgets are being eroded much more than what the government’s inflation implies.

Finally, it is the businessman and the corrupt who are benefiting the most from the inflation. Money from the pocket of the buyer goes into the cash box of the seller. Their collective profits and incomes have been shooting up in the last six years as shown in the Alternative Economic Survey of 2007. These sections are able to splurge even more than earlier and that is creating further demonstration effect and disquiet. To the middle class family whose child has not been able to join the corporate sector or if it is not in a position to generate some illegal income, something appears to be desperately wrong—others are marching ahead while they are struggling to retain their position in the pecking order.

Global Factors

GLOBALLY, crude petroleum prices have risen ($ 126 per gallon compared to $ 50 last year) and affect us since we import 70 per cent of our requirement. The short-sightedness of our policy-makers who have been propagating energy intensive development is apparent. It was hoped that the rise of the rupee in relation to the dollar would help lower the inflation rate. But with energy prices rising even faster, this effect has not been visible. It has only moderated some of the possible price rise.

Global food shortages are affecting international prices of foodstuff. Our net imports are three per cent of our consumption of food but since we are much more integrated into the world foodmarkets due to the WTO regime, we are also affected. Wheat, rice and oilseeds prices have gone up sharply. Diversion of land to produce bio-fuels is one of the causes of growing shortage. In the USA, corn used to produce fuel now accounts for 20 per cent of the grain production. Further, in China, land is being diverted from food production to urbanisation and industrialisation. Drought in Australia has reduced production there. In India agricultural land is getting diverted to SEZs and other mega projects. Global stocks have fallen to about half in the last few years and this is signalling the developing crisis in the food economy. According to the UN, three billion people are food insecure now and 18,000 children die of malnourishment daily. A large percentage of these are from India.

George Bush’s Take

WE have allowed our food security to be dented by going in for more of cash crops or by letting investments in agriculture stagnate and decline so that we are not able to produce foodgrains faster than the increase in population. Consequently, our per capita food production has fallen after 1991. But the rich are consuming more indirectly through increased intake of meat and poultry, thus leaving less for the poor. One unit of meat requires up to six units of food and one unit of poultry requires two units of food. Since the nineties, the current policy- makers have argued that food production is not critical since we can import if we have foreign exchange reserves. The chickens have come to roost—we have more than $ 300 billion of reserves but are struggling with rising food insecurity.

George Bush spoke a partial truth that India’s (and China’s) rising prosperity (in per capita income terms) is putting pressure on global food prices. As pointed out earlier, our net imports are not much higher; it is the global supplies that are the problem. Further our per capita consumption of cereals and pulses has dropped between 1991 and 2005 from 510 grams per day to 440 grams per day because the poor are not even able to afford what they could earlier. (This trend was anticipated as early as 1994 in the Alternative Budget.)

The rising consumption by the well-off is being over-compensated by the decline of the consumption of the poor. No wonder, malnourishment amongst children and women is so high. If we are eating less on the average and importing roughly the same as earlier, how can India be one of the causes of the rising food prices? What George Bush fails to see is the enormous waste of food in the USA where obesity is a problem and where only 30 per cent of the food consumed is absorbed by the body.

Another important cause of the rise in food prices is the moderation in the subsidies that used to be given to food products. This is not only a result of the WTO related pressures but under the New Economic Policies after 1991, to reduce the fiscal deficit, subsidies were required to be curtailed. Further, under these policies, the PDS was expected to be scaled down. This was an important instrument of release of food into the market to keep prices in check. Thus, even if the poor did not get food from the PDS, they benefited from the moderation of prices in the market. The successful running of the PDS did require subsidies for moderation of prices and as subsidies have been curtailed, their role has declined.

With elections approaching, businessmen have become emboldened to raise prices. They feel they can get away with speculation, hoarding, cartel formation, etc. If there is a small shortage, speculation makes the shortage greater. Suppliers hold back supplies to make a profit later and those wanting to purchase, try to buy more than they need currently so that they can hope to save on costs. Thus, the supply-demand gap widens and prices shoot up more than necessary. Futures trading by making more money available to speculators aggravates shortages. Similarly, the entry of corporates (Indian and foreign) with deep pockets in the foodmarkets also leads to aggravation of speculative activity and adversely affects prices. Anticipating price rise, they would buy more and increase the shortage.

Steps by the Government

IN the case of cement and steel, the government has pressed the cartels to bring down prices but this may prove to be temporary. It is the recent request/intervention of the PM that got some action from the cartels but this is unlikely to last long. For instance, right after the Union Budget, even though excise duties on steel were reduced in the hope that prices would be lowered, steel manufacturers raised the prices rather than lowering them or holding the price line. There are many such cartels (like, the IIMs) in the economy.

The government could do a lot more but acts reluctantly given its market oriented philosophy. For instance, it could act against hoarders and force them to dehoard the stocks but the steps taken appear to be lukewarm at best. This reluctance leads to delays and the situation tends to slip out of control.

The PM has said he is against drastic steps and the public should be patient—wait for steps to have their effect and for a good monsoon. He has clearly expressed his preference for business whose growth is more important than the suffering of the people due to the inflation. Could he not have done the opposite, request business to have patience and lower its huge margins on the basis of which it has produced the second largest number of billionairs in the world in one of the poorest countries? That would have benefited the public by lowering the rate of inflation. Did the PM pick up anything from the Bhutaneese people’s unique experiment with the human happiness index? After all, people matter more than anything else.

Conclusion

A viable and active PDS system is a good check to successful hoarding and evening out shortages amongst the population but, as noted earlier, this has been run down deliberately and little is being done to revive it. The government’s recent announcements that the food crop is a record one and that procurement is much larger will help lower inflationary expectations but that maybe temporary. Further, while there are international reasons for the high rate of inflation, there are strong internal ones also that are entrenched in the development path we are currently pursuing. Small instabilities and gaps in supply and demand quickly become big ones given the global influences. Globalisation needs to be revisited. The government needs to remove its pro-corporate blinkers and face the reality that its policies are leading to higher inflation and social discontent.

(Enlarged version of an article published in The Tribune)

Dr Arun Kumar is a Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail: arunkumar1000@hotmail.com

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