Bracing against inflation

As per the NSO’s data released on May 10, the retail inflation eased from 4.85 per cent in last March to 4.83 per cent — a marginal decline (0.01 per cent). However, food inflation increased to 8.7 per cent from 8.52 per cent in March, while vegetable inflation stood at 27.80 per cent year-on-year down from 28.30 per cent in March. Food inflation, which was less than 1 per cent in October 2021, shot up to 5.4 per cent overall and 5.9 per cent in urban areas by January 2022. Currently, inflation rates for cereals and pulses — the staple diet of Indians — are recorded at 8.63 per cent and 16.84 per cent, respectively. The RBI suspects that though the headline inflation eased from its peak in December 2023, the erratic movement of food prices may cause uncertainties for future. Inflation always hits the working classes and low-income groups the most because of their limited earnings and maximum spending on food provisions for the families. The case of unemployed people could be even worse. If not addressed effectively, inflation can severely destabilise the economy in the future, though not necessarily on a scale as it did to the economies like Zimbabwe and Sri Lanka in the recent past.

Theoretically, the most common causes of inflation are: rise in disposable incomes and increase in purchasing power known as demand pull inflation, higher fuel costs (crude oil) impacting the prices of goods and services termed as cost push inflation (which is mostly true in Indian context), wage hikes and consequent higher pricing of goods by manufacturers (built-in inflation), and supply chain disruptions due to sudden wars, natural calamities and disasters. However, both local and global factors play a significant role in pushing up inflation. According to Anirban Bhattacharya and Pranay Raj from Centre for Financial Accountability (www.thewire.in 29 September 2023), when the Russian invasion of Ukraine and supply cuts by OPEC nations led to sharp increase in food price inflation all over the world, in India, the additional factors that worsened inflation were demonetisation, GST and the pandemic. The unorganised sector, which employs about 85 per cent of the workforce in the country, was the worst hit since the wages were never adjusted for inflation. For example, while the wages of construction workers and agricultural workers have increased by only 10.5 per cent and 12 per cent, respectively, between 2021 and 2023, the prices of cereals have gone up by 22 per cent. The arguments seem to be corroborated by a recent survey by Motilal Oswal, which revealed that household debt levels have touched an all-time high of 40 per cent of GDP in December 2023 while the net savings have dropped to lowest level of 5 per cent. However, it is said that the current rate of inflation at 4.83 per cent is within the RBI’s ‘tolerance range’ of 2-6 per cent.

Food Inflation is a heads-up for the economy, for it may lead to structural inflation engulfing almost all sectors, leading to rise in prices of household consumer goods, fuel, power, transport, healthcare, and other essential services. A bullish stock market performance is not really reflective of a possible economic crisis in the future since sentiment influences the money markets more than fundamentals do. Similarly, the official statistics may not truly reflect ground realities concerning the poor and vulnerable sections who struggle to make ends meet amid shooting prices of essential goods. According to the UNDP, even in developed countries, as revealed by an Ipsos poll for the World Economic Forum, 25 per cent of people are struggling financially. In the UK, one in seven adults said that they cannot afford to eat every day.

Governments all over the world necessarily intervene to control inflation, but there is no single proven method to rely upon. Conventionally, central banks resort to contractionary monetary policies to discourage borrowings and encourage savings. The RBI maintained the repo rate at 6.5 per cent for the seventh consecutive time, as announced by the Monetary Policy Committee (MPC) on April 5. However, in developing countries where financial inclusion is a major challenge, the macroeconomic measures of this nature have little impact. According to the World Bank’s Global Financial Inclusion Database 2017, though 80 per cent of Indian adults have Bank Accounts, India’s share of inoperative accounts in the world is the largest at 48 per cent while the average of the developing countries is 25 per cent.

According to the Chief Economist of UBS, Paul Donovan (author of ‘The Truth About Inflation’), governments cannot really do much since the prices of oil or foodgrains cannot be changed suddenly any more than they can influence the impact of the Ukraine war on food and fuel prices. However, he suggests that governments can either look at benefits that are being paid to try and help people for higher prices, or where something is being taxed. Some countries have initiated steps to directly support people in addition to contractionary monetary policies. France spent 13 billion Euros to dole out a one-time grant of 84 Euros to each beneficiary of economically disadvantaged classes, to reduce taxes on power and to restrict the rise in energy bills to 4 per cent. Germany announced subsidies for low-income groups and also slashed down taxes on petrol and diesel. Other measures included a one-time grant of 300 Euros per person, public transport discounts and child welfare grants etc. Italy declared fuel subsidies worth 14 billion Euros and also raised taxes on power companies who benefitted by rising energy prices. Spain has allowed 300 km free train travel for three months while Germany introduced USD 9 monthly public transport pass. In Scotland, rents were frozen to help citizens cope up with rising cost of living. The UK is giving 8 million low-income households a direct payment of USD 780 and an energy grant of USD 480 .

In India, too, apart from contractionary monetary policies, we may well contemplate on providing direct benefits to people, emulating the experiments of European countries. While initiating steps for direct support to people, it is also essential to keep in mind Amartya Sen’s distinction between ‘income inequalities’ and ‘economic inequalities’; while the former refers to wage disparities, the latter means unequal opportunities due to factors such as gender, religion, caste, region etc. People suffering from economic inequalities are more vulnerable to the adverse impact of inflation. Cash handouts, discounts on public transport, communications, streamlining PDS, special schemes for migrant labourers and vulnerable classes can help the people to brace against inflation. Good governance by revitalising delivery mechanisms is equally important to check hoarding and profiteering practices. The ongoing employment-generation schemes like MGNREGA need to be monitored regularly to ensure incomes to the rural population. Finally, the agriculture sector and the issues of farmers need immediate attention as the monsoons are round the corner. A bumper harvest will be a blessing in difficult times.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal