Originally Published 2011-06-30 00:00:00 Published on Jun 30, 2011
India is experiencing the fastest increase in prices among the big emerging market countries. The Reserve Bank raised interest rates 10 times since March 2010 to control inflation, and its adverse impact on the demand for goods and services, investment and corporate profits is already visible.
Inflation is back: The number of poor in India may rise
High inflation is back with us - as reflected by the Wholesale Price Index (WPI) which rose to 9.06 per cent in May 2011. Now the diesel, kerosene and cooking gas price hike will make things worse for the common man. Food inflation, which had receded on June 4 to 8.9 per cent, is also back at 9.13 per cent.

India is experiencing the fastest increase in prices among the big emerging market countries (Brazil, Russia, China) which is already having deep ramifications on foreign investment and its stock markets. Inflation in China, causing problems of competitiveness to its manufactures, is almost half (5.5 per cent) of that in India. Basically, the Government of India is facing problems of mismanagement and lack of governance in being able to control runaway prices. The Central government is not taking enough strong steps either to stop corruption or arrest the rising inequalities or tackling inflation. Regarding stock markets, India's is one of the worst performing ones and even Pakistan's stock market is doing better. Inflation in India is discouraging foreign institutional investments.

The Reserve Bank of India has raised interest rates 10 times since March 2010 to control inflation, and its adverse impact on the demand for goods and services, investment and corporate profits is already visible. The Index of Industrial Production fell to 6.3 per cent in April from 8.8 per cent in March 2011. The GDP growth has also slowed down to 7.8 per cent in the three months ending March 31. Unfortunately, the multiple rate hikes have not been able to tame inflation.

Some basic problems of the Indian economy also remain unresolved. In agriculture, inadequacies in infrastructure, mainly in storage space, irrigation and transport of perishable goods, remain. The minimum support prices for foodgrains, on the other hand, have been raised again which means that there will certainly be higher foodgrain prices next season despite the bumper crop.

The hike in diesel prices will hit all transportation costs and it will have a cascading effect on the prices of all commodities. Another petrol price hike is also imminent, given the current losses of the government oil companies. The excise and customs duty cuts on petroleum products, aimed at relieving the burden on the common man, will mean Rs 49,000 crore revenue loss for the government's exchequer which will cause problems in controlling the size of the fiscal deficit.

How will the poor cope with high food and non-food inflation? Even going by the Planning Commission figures, there are over 300 million people living in abject poverty. According to it, there are less poor today than three years ago and poverty is supposed to have come down from 37 per cent to 32 per cent in 2009-2010. But there are many more millions who are just "above the poverty line" and are still miserably poor.

India's growth story could indeed be spoilt if we have large numbers of poor without skills, employability and good health, and also have high inflation. This is because with meagre incomes in times of inflation, poor people spend a large chunk of their earnings on food which leaves them with very little for other essential requirements like health, education, housing and nutrition of children. It is a dangerous situation as it affects the welfare of the future generation.

In many parts of India, poverty is persisting and people are getting deeper into it. This is the case in tribal areas where the level of human development is very low, and people inhabiting those areas have for centuries depended on forest produce. With their land taken away from them by the state and sold to private mining or manufacturing companies, a sizeable tribal population has nothing to live on. They are not trained in skills and cannot get jobs. They are easy recruits for the Maoists, who keep looking for disgruntled youth having no future.

Unskilled labourers, who have no assets but only labour to sell, are also at the risk of remaining poor for generations and with high inflation, their expenditure on education and health of children will fall further.

While it is true that the Indian middle class is growing and more than before people are enjoying foreign travel, can afford private schools for their children and own cars, houses/ flats, yet there are millions who are outside this charmed circle and are suffering multiple kinds of deprivation. The middle class does not mind a hike in petrol/diesel prices because it is a small proportion of its budget, but the poor have to pay higher prices for all goods. Inflation is making the poor poorer.

Instead of concentrating on controlling inflation through hikes in interest rate and expecting people to save more and spend less by raising EMIs (equated monthly instalments), the government ought to make its public distribution system, health care, water supply, education and public transport facilities more efficient and accessible.

In times of high inflation, subsidised foodgrains help the poor because these provide for their basic nutritional needs. But, instead of trying to improve it by plugging the loopholes, the government seems keen to dismantle it and substitute it with direct cash subsidies from next year.

The poor ought to have more access to public goods than the rich which is the basis of an egalitarian society. Here in India, more and more people are going for personalised transport - cars and two wheelers - choking the roads and highways and increasing congestion and air pollution because of lack of a satisfactory public transport system. All industrialised countries have spent huge amounts on an efficient public transport system over decades, and have encouraged people to use mass rapid transport facilities, but this is not the case in India so far. This lack of efficient/cheap transport will affect the poor more.

The EU members, Canada and Nordic countries also have an efficient health care system and a good public schooling facility. In India, even the poor have to go to private clinics and hospitals.

The water supply system is also good in most developed countries, where everyone has access to tap water. In India, water treatment plants are not doing a sufficiently good job, and most urban people (even the poor) drink filtered, boiled or bottled water, adding to the cost of living of the average citizen.

As for rural India, inflation is having a severe impact on the health of children and their schooling. Higher kerosene prices will increase the lighting and cooking expenditure of the rural population. The rural poor will suffer in many ways and this will have long-term effects on human development in the country.

Courtesy: The Tribune
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David Rusnok

David Rusnok

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

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