Joan Robinson, the great Cambridge economist, used to say that economics is an important subject mainly because it prevents you from being fooled by other economists. (Quoted in ‘An Intellectual Phenomenon called Joan Robinson’, Amit Bhaduri, EPW, August 14, 2010). After reading this report in the Economic Times on the inflationary situation in today’s India, I can fully understand what she had meant. This report of the Economic Times is an example of how to use apparent sophistry to fool people. In fact the authors of the report can write a book, a la Dale Carnegie, on How to Use Jargons and Fool People.
Let us first enumerate the main claims of the aforementioned report on inflation:
There has been huge across the board increases in income with the Sixth Pay Commission, stimulus packages and rural development schemes like the NREGA.
There has been increase in wages paid to the workers
Moreover with increases in real estate and share prices, wealth effect has increased which is again increasing demand in the economy.
As a result of this increase in income, inflation is taking place in the economy.
Again, since wage has increased inflation is not causing too much hurt to the people
Hence, people are living life extravagantly and buying LCD TVs, cars and other luxuries.
Theoretical Fallacy of ET
Each of these claims is wrong both in terms of theory as well as empirically. Let us look at the theory first. I have mentioned this argument in Pragoti before, still I think that it should be repeated here. Firstly, the definition of inflation according to mainstream neo-classical economics is a situation where all prices including money wages increase. In this situation, the inflation does not hurt the poor since the real wage which is a ratio of money wage and prices will remain more or less constant. For example, suppose earlier my income was Rs 100 and the price of rice was Rs 5 per Kg. So, I could buy 20kg of rice with my income. Now, if my income increases to say Rs 110 and the price of rice increases to Rs 5.5, (which means a 10% inflation rate) then it does not hurt me at all, since I can still buy 20 Kg of rice. In other words, inflation hurts the poor only when the prices of commodities rise with respect to money wages/income. Any talk about inflation hurting the poor is premised on the fact that prices have risen relative to wages. Therefore, any notion which seeks to identify the rise in prices with a rise in income should not be concerned about the plight of the poor at all, since their real wages will remain more or less same in this situation. The basic claim of the ET report is precisely this that this inflation is not hurting the poor at all. They are jolly well leading their lives without any problem.
Theoretically, even this claim is indefensible because of the following reason. Let us assume for the sake of argument that what the ET report claims is in fact true, i.e., the money wages of workers have actually increased and as a result there is inflation and their real wages remain constant (the ET report in fact claims that the real wages have increased.) [Update in the light of Jyotirmoy's comments] Three different situations can be visualized here. Firstly, (as per Jmoy's comment) the money wage and the prices continue to rise proportionally, provided that the expectation of both the capitalists and the workers (in terms of share of output) are realized, in which case there will be steady inflation. Secondly, the expected share of output of the capitalists and the workers together is greater than one.
If this situation also continues in the next period then In this case there will be increasing rate of inflation because of the following reason. If in the next period too, the money wages are increased then the capitalists will increase the prices to maintain a particular profit share. As a result, prices will rise. If this continues in every period, then there will be explosive inflation, which nobody visualises. But for both these cases there has to be a strong trade union to bargain a realize the expected claims on output, which is definitely not the case in India. Therefore, a situation where money wages and prices increase at tandem with or without realizing expected share of output ad infinitum is an unstable situation for capitalism and hence cannot occur. Thirdly, it can be the case that wages do not rise in proportion to prices. This will result in inflation rate coming down. So, when the government talks about inflation coming down precisely this situation is envisaged, which the ET has supported quite often. I n other words, there has to be some shock absorber in the system whose price does not rise. The easiest target for this is labour, whose price, money wage, does not rise in tandem and hence inflation comes down. In other words, even if we accept ET’s picture of the current episode, in the next period, money wage rate cannot increase in tandem with price, since this will lead to explosive inflation threatening the stability of the system. Surely ET does not envisage the latter. Hence, only the former case is plausible. In other words, money wages cannot increase in tandem with prices ad infinitum. in the absence of a strong trade union. Moreover, any argument which believes that inflaton rate is going to come down is premised on the fact that money wage will not rise in tandem with wages. The essence of ET portraying the picture of an increase in wage in tandem with prices is to paint this picture that all is well in India. Unfortunately, empirically, ET is on very slippery grounds.
Almost all the claims of ET in terms of claims about an increase in income leading to an increase in inflation is wrong even if we go by hard statistics. Let us see how.
Sixth Pay Commission and Stimulus Package
It must be remembered that Sixth Pay Commission expenses incurred by the government are an once off expenditure and that too concentrated on a small proportion of the total labour force, pertaining to the government employees, who constitute less than 7% of total work force in the country. Moreover, the current Governor of RBI, Mr. D. Subbarao, in an interview had said that the total impact of the Sixth Pay Commission will be around 0.4% of GDP, which is peanuts and clearly not enough to explain the huge inflationary trend in the economy. In other words, the ET does not have its research team in order.
The issue of stimulus package is another red herring that the ET wants to use to confuse the real issues. It has been estimated by none other than the IMF that the total fiscal stimulus announced by the Government between 2009-10 was only 0.5% of GDP, which is again too little to have any impact on the overall demand condition in the economy. Therefore, to blame either the Sixth pay Commission or the so called stimulus packages is blatantly wrong.
NREGA and Inflation
The issue of NREGA has always been a target from the right wing sections within India. Now, it is being targeted under the pretext of inflation. But the real picture is again somewhat different. A back-of- the-envelop calculation on how much demand can NREGA generate suggests the following: Total investment on NREGA in 2009-10 was roughly Rs 40000crores. We assume that all of it is spent this year (which is hardly a possibility). We also assume that all of it goes to pay wages (another impossibility)! Now, if 90% of wage income is devoted to consumption of food, total additional demand generated through NREGA is Rs 40000*0.9= Rs36000crores. How big is this? GDP of agriculture is Rs898378 crores (2008-09) or roughly Rs9 lakh crores. So additional demand generated would be just 4% of GDP in agriculture, which is a miniscule amount. More over the economic survey shows that total rise in private food consumption demand is only 2.7% in 2009-10. Therefore, the argument that inflation is a result of government expenditure in rural areas is completely wrong.
The other issue is with regard to increasing wages in the country. It has now become clichéd to again and again point to the Arjun Sengupta Committee report which says that 77% of the population earn under Rs 20 per day. What is even more shocking is that according to the data of Annual Survey of Industries, the share of wages in total value added has declined from around 24% in 1990-91 to 12% in 2004-05. In other words, throughout the entire neo-liberal period in India, there has been a decline in the share of wages in total value added. There is no reason to believe that this pattern has changed in the last couple of years.
The Reality of India
Contrary to what the ET wants us to believe the reality of India is far away from the glittery of super market stores and LCD TVs. A recent report by the Oxford Poverty and Human Development Initiative shows that there are more poor people in 8 states of India than in Sub-Saharan Africa. Moreover, contrary to the tall and false claims by the ET, a UN report has stated that there will be significant increase in poverty in various parts of the world including India as a result of the inflation of food prices. From where did ET get the idea that rising prices is doing well for the poor is anybody’s guess! The ET being the spokesperson of the rich and elites conveniently ignores these issues and only boasts about rising real estate and share prices and increasing sale of luxury consumer goods.
Yes, it is true that there has been an increase in the share prices in India. But the point is that less than 1% of Indian people are investing in stock markets. It is surely the case that the rich are getting richer in India. It should not be forgotten that when lakhs of farmers were committing suicide in the country, India became the country with the maximum number of dollar billionaires. Simultaneously, the inequality in the country has increased and for the rich and the elite indeed the inflation does not mean much. But the point is that the poor, the vast majority of India, are reeling under the pressure of inflation. The glitter of urban elite India should not blind us from the reality of suffering India. Newspapers like ET precisely want to do that. But as it is well known, truth cannot be hid by such convoluted attempts masqueraded as sophistry of the US returned economists.