Originally Published 2010-08-17 00:00:00 Published on Aug 17, 2010
While the common man or woman has to save for hard times and cut corners on everything, the same is not happening to the budgets of the Central and state governments.
Growth with high inflation - Who bothers about the common man?
While the economy is all set to grow at 8.5 per cent and inflation is supposed to come down to 6 per cent by December this year, the government does not seem to be worried about recession and industrial slowdown that the European Union and the US have been faced with. India’s unemployment rate is not a double digit one yet and industrial growth is at 11.5 per cent. There are also signs of robust company results, coming especially from the service sector, and generally the economy seems to be on a roll.

Unfortunately, the common man may not seem to be very happy. He or she is burdened with not only the price rise, which has been in double digits for the last six months, but is also shell-shocked at the level of corruption in the country. It is no comfort to ordinary people that inflation is normal for a country experiencing growth (as explained by the Finance Minister in the Lok Sabha recently) because people with fixed incomes are facing severe problems of managing their budgets.

While the common man or woman has to save for hard times and cut corners on everything, the same is not happening to the budgets of the Central and state governments. While the Central government has been (unexpectedly) enriched by the sale of Generation-3 telecom auction bids by Rs 1 lakh crore, there is already a huge list of proposed expenditure on various items for which the government is asking for additional borrowing. Thus, the expectation that the fiscal deficit will be brought down by the additional money in the government’s coffers is not going to materialise and the fiscal deficit will either be the same or exceed the budgeted amount.

There is no sign of austerity in government spending either in the case of the Commonwealth Games or elsewhere. The expenditure for the Games has been blown out of proportion as seen in daily reports. Similarly, in other fields, expenditure overruns are common. The government has also promised a more efficient public distribution system to tackle inflation and malpractices with smart cards for the poor. The poor are expected to be well versed in the use of smart cards when they will be available next year. Hopefully, instead of one rupee that the poor receive out of Rs 7 spent on the public distribution system, they would receive at least half. It would not be an easy task to reach food to the 8.7 crore BPL families.

But, according to a recent NCAER report, the number of the poor is declining. According to the study, the number of the rich today is outnumbering the poor and there are 46.7 million high-income households as compared to 41 million low-income ones. And 62 per cent of Indian households belong to the middle class. It may be true that many people who were poor have climbed up on the income ladder as a result of the economic transition in India from a closed to a globalised economy.

But a recent report by Oxford University is puzzling. According to its multidimensional poverty index, India has a higher number (421 million ) of people living in intense poverty in eight states (Madhya Pradesh, UP, Chhattisgarh, Jharkhand, West Bengal, Bihar, Orissa and Rajasthan) than in all the 26 countries of Sub-Saharan Africa which have 410 million poor. The Oxford index has taken into account parameters like health and education besides income, which seems to be more rational and realistic.

According to the NCAER report, the growing demand from rural India is the reason why industrial growth did not falter during the global meltdown of 2008-09 as compared to other countries in Europe and the US. Rural demand is, of course, important for pushing up the growth of “fast moving consumer goods” ( FMCG) industries. It is also true that the middle income people in rural India are big consumers of mobile phones, motor bikes, soaps, detergents, toothpaste, etc, and that the urban middle classes are spending a relatively less percentage of their incomes on food, and high food prices are not hurting them as much as is true about the poor.

It would have been wonderful if the number of poor actually shrank rapidly with growth. But that is unfortunately not the case, and the reason is the unequal distribution of wealth in recent years, which has been endorsed by the Oxford report. According to the Tendulkar Committee report (2009), 37.2 per cent of the population is still poor. Thus, unless their welfare is looked into by a special safety net by the government, there would be a political fallout in the future.

For them inflation at 10.5 per cent, fuel inflation at 14.2 per cent and food inflation at 9.5 per cent (July 2010) are extremely hard to bear. Add to this the higher rent and other service costs.

Fortunately, the usual fire fighting is going on by the Reserve Bank of India, which has hiked key interest rates four times in the last one year. Recently also it hiked the repo rate (the rate at which the RBI lends to banks) by 0.25 per cent. But with so much black money floating around and with so much being spent and misspent on the Commonwealth Games as well as the Pay Commission rewards and cash handouts under NREGA, it would be very difficult to tame inflation drastically in the near future.

The other factors that are contributing to inflation may also be difficult to resolve like the various structural problems of an inefficient infrastructure, high cost of raw material and high land prices . These are likely to push up the prices of manufactures in the future. One good news, however, is that the Chinese economy is slowing down and as a result, metal and other commodity prices are coming down. This may lead to better company results and can help them in holding down the price line.

Higher agricultural growth may make a difference to food inflation. With 1.3 billion population, there is no way India can have food security unless agricultural growth is revamped. The decline experienced in agricultural production last year has to be made up this year if the monsoon is good. Only then can essential food items be available to all, especially the poor. A higher production of pulses is important for adequate protein intake of children. Unless food inflation comes down further, even the middle classes will feel the pinch and may not be able to afford fast-moving consumer goods and consumer durables like new cars which may, in turn, drag down industrial growth and GDP growth which the government is so sure of this year.

Courtesy: The Tribune, August 17, 2010
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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