At a time when Consumer Price Index (CPI) inflation has remained above RBI’s upper tolerance level of 6% for seven consecutive months and the WPI inflation rates are at the highest levels since January 2007, it is good that the issue was finally discussed in parliament and the RBI’s recent rate hike signals recognition of the concern. However, during the debate in the parliament, the Treasury bench largely took a view that there is no inflation in the country. If we are asking the top 1% of the country who possess 73% of all wealth, then of course it is not going to affect them. Inflation disproportionately affects the poor, middle class and rural areas.
The demand in rural economy was undergoing stress even before the pandemic due to lockdowns and disruptions at the global level. When we look at the inflation data, we find that CPI has grown at a higher rate in rural areas compared to urban areas since December 2021. This becomes more concerning due to high unemployment and declining rural wages. Recent data shows that despite fall in demand for work under MGNREGA, the work provided under the scheme is 27% more than the work provided in June 2019. This clearly indicates heavy dependence of households on MGNREGA in the absence of employment avenues. The nominal rural wages have also not increased in the current financial year while the real wage growth is behind the current rate of inflation, thus resulting in net income decline. This has led to increasing indebtedness in rural India. In 2021, rural indebtedness at 84% was almost double the urban indebtedness at 42%.
A steep increase in prices of essential commodities such as LPG, vegetables, petrol, etc. has significantly increased the cost of living in urban households while diminishing their purchasing power. Among urban households, urban poor constituting 20% of the population have probably suffered the maximum. According to CRISIL, the effective inflation for the urban poor was 6.3% in January 2022, 0.4% higher than the top 20% of households in urban India.
While government programmes such as LPG subsidy or PDS create some cushion against inflation, they exclude the middle class. For instance, the LPG subsidy only extends to 9 crore beneficiaries under the PMUY scheme, leaving an estimated 16 crore middle class households to bear the heavy cost of gas cylinders.
According to the RBI, the gross savings of the country have reduced from 29.4% in 2019-20 to 27.8% in 2020-21. Further, net financial assets (% of GDP) of households have fallen to 6.9% in Q2 of 2021-22 from 10.6% in Q2 of 2019-20. At the other end, financial liabilities (% of GDP) have risen to 3.2 in Q2 of 2021-22 from 1.9% in Q2 of 2019-20.
The current inflationary pressures are not entirely imported. The contribution of fuel in the CPI basket is only 10.5% with the maximum contribution coming from food inflation which is about 40%. Within the food inflation basket, vegetables contributed the highest share at 33.3%. When we look at the causes of the high prices of vegetables, we see that supply-side factors such as lower availability due to unseasonal rains, heatwaves and higher transportation costs – all domestic factors – added to the price pressure on food crops. Therefore, a large chunk of current inflation is due to domestic supply-side factors and must be resolved domestically.
Due to the pandemic, about 200 million people fell into poverty. With the current inflation, this number will increase. Therefore, a structural resolution of the issue is essential.
Since food inflation is at the core of current inflationary pressures, changes in monetary policy by hardening interest rates alone cannot have much impact. It may further deepen rural distress and growth. Further, with the current volatile geopolitical situation, a weakened rupee and costlier imports, the additional cost on the exchequer will be high. Therefore, a roadmap for fiscal policy consolidation is needed to rationalize non-capital expenditure.
India wastes approximately 40% of its agricultural produce. To minimise this, it is an apt time to implement ‘farm-gate to market’ end-to-end integrated micro cold chain systems. The government should conceptualise a national mission to set up such cold chain systems not only to attenuate current inflationary pressures but also to mitigate future seasonal variations in vegetable inflation. Additionally, it is no secret that climate change is altering weather patterns, thus affecting 55% of the country’s food basket directly. Therefore, it is high time that the country increases its investment in climate-resilient agricultural practices and adopts a coordinated institutional framework to reduce production uncertainty.
Lastly, to ensure that the burden of inflation is not borne by the poor, free distribution of ration should extend beyond November and PMAY houses should be sanctioned for all. Further, schemes like Odisha’s “Biju Swasthya Suraksha Yojana” in which health is assured not just insured, should be extended to all citizens.
All this would decrease heavy out-of-pocket expenditure of households, particularly at the rural level. This would not only reduce distress in rural households arising out of inflationary pressures, but also provide headroom for them to explore other livelihood enterprises to bolster their income.
(Dr. Amar Patnaik is a Member of Parliament, Rajya Sabha from Odisha; a former CAG bureaucrat and an advocate.)
Disclaimer: These are the personal opinions of the author.