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Is the Curse of Inflation Over? – IMPRI Impact and Policy Research Institute

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Is the Curse of Inflation Over? - IMPRI Impact and Policy Research Institute

Arun Kumar

A high inflation rate increases poverty – an issue flagged by the ILO’s Global Wages Report 2022-23. The scale of poverty in India is reflected by the government’s scheme to give free food to 81 crore poor people for one year from January 1. The government’s claim of India being the fastest growing large economy and persisting poverty at such a scale don’t square up.

2022 will be remembered for the start of a new Cold War, for a fusion energy possibility which is akin to controlling the Sun, for the James Webb telescope which confronts us with our insignificance in this universe. But the majority, not only in India but globally, will remember 2022 for high inflation. The Union Budget to be presented in two weeks will at a macro level influence both growth and inflation. While growth needs to be boosted, it is prices that impact the majority in the country and need to be addressed as a priority.

The government claims that on the inflation front, India is doing better than other nations – but across countries, the rates are not comparable with each other due to country specificities. For instance, the wages of the unorganized sector workers, the overwhelming majority, in India are not indexed to inflation. Their living standards decline with inflation, unlike in most advanced countries where largely, wages have some link with inflation. Thus, a 5% rate of inflation in India is worse for workers than an 8% rate in the US.

India’s inflation

In India, the rate of inflation measured whether by wholesale price index (WPI) or consumer price index (CPI), has declined recently. WPI rose at above 10% for 18 months, peaked in May 2022 at 16.63%, and came down to 8.39% in October 2022. CPI inflation was at above 6% (above RBI’s acceptable band) for 10 months and declined to 5.66% in December 2022. But is the recent decline in the rate of inflation any consolation for the unorganized sector, constituting 94% of the workforce?

Unorganized sector workers are doubly impacted because many have lost employment or do not have adequate work and incomes. A large number of women are out of the labour force and many of the educated young are unemployed. Their families have to support them and that raises family poverty.

Of the 28 crore unorganized sector workers registered on the e-shram portal, 94% have declared their income as less than Rs 10,000 per month. The World Bank poverty line is now $2.15 or Rs 176 per day per person. It is in purchasing power parity terms, so a family of five is poor at an expenditure of Rs 13,000 per month. Effectively, most of the unorganized sector workers would be below the poverty line.

Inflation and prices

A decline in the rate of inflation does not mean that prices are falling. It only means they are rising less than earlier – but on a higher base. So, if the inflation rate last year was 10%, it meant that the average price of items rose from Rs 100 to Rs 110. Now, if the inflation rate becomes 5%, then it means that the price becomes Rs 115.5. It does not mean that the price falls to Rs 105.

A given amount of money buys less as prices rise. So either the individual buys less than earlier or has to shell out more money to buy the same amount as earlier. In the former case, the living standard of the individual falls. In the latter case, the savings of the individual decline. Either way, individuals lose unless their incomes rise at least at the same rate as the price rise. This is called the indexation of incomes to prices.

If all workers, farmers, etc. were indexed to inflation as some in the organized sector are, then inflation would not matter.

Inflation across different sections

Individuals in society belong to different classes, have vastly different incomes, and consume very different things. A poor or a lower middle-class person does not buy cars. Most of their expenditure is on food and fuel. For the rich, these items are a small percent of their total expenditure. The children of the poor go to schools that are cheap or free, while the children of the well-off go to expensive private schools.

So, each class experiences a different inflation rate for two reasons. The inflation rate is an average of price rise in different items. For instance, an increase in food prices may differ from that for clothing. For electronics items, prices may be falling. Further, how much of an item is consumed (or not consumed) by an individual in a group determines how much that item contributes to the inflation faced by that group.

So, food items maybe 50% of the consumption of the poor while it may only be 2% for the rich. So, food price rise will impact the poor hard but have little impact on the well-off.

What a member of a group typically consumes is called the consumption basket of that group. An agricultural worker has a different basket than say a white-collar worker or a rich person. That is why the impact of a given CPI inflation is different for different classes. One needs to calculate the price rise for each consumption bundle. A common inflation rate for all neither captures the impact on the poor nor on the rich. Earlier each category of people had their own CPI inflation rate, which better represented inflation.

Who Benefits from Inflation

In India, most wages are not indexed to inflation so the vast majority see their standard of living decline. Does anyone benefit from inflation?

If production is increasing as growth occurs, the total national pie is growing. But if the majority are buying less because of inflation then someone else has a larger share of the pie – and they are the businesses. The implication is that national income is shifting in favour of businesses (as a group) at the expense of salaries and wages. After all, prices are raised by businesses and they get additional money from the buyer which leads to higher profits. No wonder, stock markets are booming, thereby further benefitting the rich as their wealth increases rapidly.

What enables businesses to raise prices and gain at the expense of others? It is due to their pricing power and weakening of labour. Witness the strikes by various sections of workers in the UK who are demanding higher wages since their standard of living is plummeting. They are organized and can strike. Most workers in India are in the unorganized sectors and cannot strike. They have to work at whatever wage they are offered because they are too poor to stay without work. They are the reserve army of labour.

RBI data of 2,700 corporates shows that their sales and profits have been shooting up in spite of the impact of COVID-19. Corporates often resort to cartelization to raise prices. At the international level, OPEC tweaks production to obtain higher prices of crude oil. Where there is competition, like in telecom, prices may drop. Here also, companies have now agreed to band together to raise prices.

Conclusion

Typically the well-off, mostly deriving income from business, have high incomes and consume a small percent of their income. The middle classes also save a little. So, both these groups have a cushion to take care of the increased cost of their consumption bundle as prices rise. For the well-off, incomes actually rise and luxury consumption increases. For the middle class, the lifestyle hardly changes as they dip into their savings. The poor, with no savings cushion, are forced to reduce their consumption as prices rise. For instance, they may not be able to afford nutritious food, good education for their children or proper medical care for their family.

So, in the coming budget, the government’s priority should be not just the lowering of the rate of inflation but steadying the prices of essential items that the poor consume. For this indirect taxes on basics (like petro goods) need to be reduced, pricing power of corporates needs to be checked and steps taken to boost the micro and small sectors. Finally, there has to be better provision of public goods, even if some call them ‘revdis’.

The article was first published by The Wire as A Decline in Inflation Is No Comfort for the Majority on January 16, 2023.

Read more by the author: Indian Rural Economy: A Closer Look at the Issues.

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