PRAGOTI

The continuing inflationary phase of the Indian economy (annual food inflation rate has increased to 9.01 per cent for the week ended May 28, from the previous week's 8.06 per cent) seems to be of little worry for the authors of the article “Inflation over the decades” published on June 8, 2011 in Business Line.  They argue that the present inflationary situation is nothing unusual when compared with those “high levels” of inflation that persevered in the post-independence period till the mid-1990s. However, the views presented in this aforementioned article are erroneous.

First and foremost, the definitions as well as the weights of the various commodities that enter into the calculation of both the WPI and the CPI have changed over the years. Hence, in the long run, a five years moving average may not be a sufficient statistical tool to compare the present inflationary trend with that of the past. Nonetheless, even if we overlook the empirical issues and assume for argument’s sake that the present levels of inflation are comparable to those of the pre-liberalization phase, then also the question which naturally arises – is there nothing worrisome about this present inflationary phase? Should the policy-makers sit idle over this inflationary situation?

Inflation, as defined in economic textbooks, refers to a phase when there is a rise in the prices of all commodities in terms of money. However, in reality, it is typically a situation where there is a rise in the money prices of commodities other than labour power relative to the money price of labour power i.e. a rise in commodity prices relative to nominal wages.

Imagine two different hypothetical situations :– i) the nominal prices of a given basket of commodities increase by 15 percent and the money wages also rise by 15 percent; and ii) the prices rise by only 10 percent and the money wages remain stagnant. Although the inflation rate is lower in the second situation, it of greater social concern because the real wages of the workers have declined. In India, the inflation that we have been experiencing, either historically or in the current phase, is of the second type since the nominal wages of the workers are not indexed to the level of inflation and ipso facto a matter of great social concern. The real wage rate index (at 1960 prices) of the workers across all Indian industries (i.e. manufacturing, mining and plantation) had declined from 5.84 in 2005 to 5.50 in 2008 (Source: Annual report, 2010-11, Ministry of Labour and Employment, Government of India). During the recent inflationary phase, the real wages of the workers might have further deteriorated. Therefore, it follows that high levels of inflation brings misery and distress to vast masses of the working population in India since their money wages are not indexed to prices.

According to the authors of the article “Inflation over the decades”, an increase in income (due to a high growth rate of 8.24 percent over the period 2004-05 and 2009-10) raised the level of aggregate demand, which in turn led to an increase in the food and fuel prices since there was a lagged response from the supply side. But this argument is also erroneous. In reality, total intake of food-grains in India had declined over the years, particularly in this decade. In this period of high growth, the per capita net availability of food grains in India actually declined from 494.1 grams per day in 2002-03 to 444.0 grams per day in 2009-10. (Source: Agricultural Statistics at a Glance 2010, Ministry of Agriculture, Government of India). It is indeed true that the rich and the neo-rich middle class has diversified its dietary pattern and is consuming, directly and indirectly, more food grains per capita. Nonetheless, the per capita absorption of food grains (both direct and indirect) in India for the population as a whole is lower now than it used to be even a decade earlier.

It has been rightly pointed out by the authors that the low trend of inflation over the period 1994-95 to 2004-05 was “the result of the structural changes in the macroeconomic framework due to liberalization”. It is because these policies, per se, are deflationary in character. In the post-1991 period, the dirigiste regime gave way to the neo-liberal policies and the pursuit of the deflationary policies labeled ‘economic liberalization, stabilization, and structural adjustment’. These economic policy packages include - very tight fiscal and monetary policy amounting to sharp domestic deflation, cutting food and social sector subsidies, scaling down protection to industry and encouraging consumer goods imports (trade liberalization), devaluation and export promotion; longer run measures included privatization of public sector enterprises including the financial sector, and in the agrarian sector, encouragement to agro-exports and commercial agri-business. These policies resulted in massive income deflation of the masses in India, especially affecting the working class and the peasantry. Such phenomenon of income deflation not only suppressed the money wage rates in these economies, but also affected the level of employment and income, especially in the non-capitalist, petty production sectors. This resulted in further suppression of the level of demand of the working class and peasantry, which in turn led to low levels of inflation over the period 1994-95 to 2004-05.

But income-deflationary policies have had long term consequences as well. While these deflationary policies compressed the level of aggregate demand in the immediate short run, it also had a long run effect on supply. The production and yield of food grains declined from 230.78 million tonnes to 218.20 million tonnes and 1860 kg/hectare to 1798 kg/hectare, respectively over the period 2007-08 to 2009-10. (Source: Agricultural Statistics at a Glance 2010, Ministry of Agriculture, Government of India). Assuming even a modest growth rate of the working population, it is evident from these statistics that the rate of growth of food grains output fell below this population growth rate, which implied that the per capita income of the working population and the peasantry in this sector kept declining over this period, adding to the already existing destitution of this class.

After a certain threshold, simple reproduction of agriculture became difficult in the agrarian sector - it became difficult for the workers in the agricultural sector to continue their livelihood in this sector since such low levels of income jeopardized their living standards. Such a situation not only suppressed the purchasing power and compressed the demand of working masses and peasants in the agricultural sector but eventually affected the supply of these commodities that resulted in a further dip of their supply. Therefore, in my view, the recent inflationary situation is a consequence of the demand-supply imbalances, where the rate of growth of supply fell below the already existing low levels of demand. Some other factors like climatic changes and abrupt monsoons also impeded the production of crops due to lack of proper irrigation facilities. This led to a further decline in the rate of growth of supply of the agricultural commodities in the commodity market and led to a further increase in the price level. Speculative activities in the futures market added fuel to this inflationary situation. This period was also marked by high levels of commodity prices in the international market - the domestic price levels got linked to the international prices and the former increased further. Therefore, the high inflationary condition persisted and still persists.

If steps are not taken immediately at a policy level to revive agricultural production and curb speculative activities, then this inflationary situation might further worsen and cross the levels that were not experienced even historically. If contractionary monetary policies are implemented like the recent announcements of hikes in repo rate by the RBI, then it will further aggravate the worsening situation. Although, these policies might contribute in further suppressing the level of aggregate demand and rein the level of inflation in the immediate short run, but the impact of it in the long run, as argued earlier, will be quite the opposite. Hence, it is important to recognize the genuine factors which are responsible for this recent upsurge in the prices and thereby suggest appropriate policy prescriptions.