The inflation conundrum

by C. P. Chandrasekhar

To the surprise of the UPA government, inflation just refuses to go away. Almost a year ago, when addressing a Chief Minister’s conference on food prices early in February 2010, Prime Minister Manmohan Singh declared: “The worst is over as far as food inflation is concerned. I am confident that we will soon be able to stabilise food prices.” Three months later, on more than one occasion, government spokespersons, like Chief Economic Advisor Kaushik Basu, declared that inflation had “peaked out” and was on a downward trend. Such statements are not surprising since in the current dispensation government representatives at the highest level are expected to talk down prices and talk up markets. It is not what you say but the confidence with which you say it that matters.

But there is reason to believe that the government did actually believe that prices would follow some sort of a cycle, and are more likely to rise slowly than at a rapid pace. One or two predictions of an impending decline are understandable. But, over the last year, almost every month or even week, one official spokesperson or the other (be it the Finance Minister, the Finance Secretary, the Deputy Chairman of the Planning Commission or the ubiquitous head of the PM’s Economic Advisory Council) declared that inflation is bound to moderate, in a voice tinged with surprise that it has not done so earlier.

This expectation came from a particular reading of the situation. Whenever prices did rise rapidly, it was attributed either to supply side factors such as a poor crop or to unavoidable factors like the “base effect”. Thus when the PM spoke in February last year he looked forward to a good monsoon and a better crop. And, if prices had been unusually low a year earlier, even a return to “normalcy” would reflect a high rate of inflation that must be discounted. Occasionally, of course, there was talk of hoarding and speculation, but only on the part of unscrupulous traders, who were exploiting temporary demand-supply imbalances.

Experience has shown that these “beliefs” were patently false. Despite the fact that the monsoon has been much better in recent seasons, the month-on-month inflation rate as reflected even by the Wholesale Price Index, which stood at a disconcertingly high level in the first half of 2008, and then declined consistently between July 2008 and July 2009, accelerated subsequently and has remained at high levels throughout 2010. And weekly WPI movements are an indication this is likely to be true in January 2011 as well.

There are a number of features of this inflation scenario. The first is that, while it is not restricted to food alone, it has been substantially driven by food articles, which are more prone to speculative influences. Even when demand-supply imbalances are minor or absent, speculation can push up prices. The second is that within food articles, inflation has at different points in time affected different commodities, such as cereals, pulses, vegetables, eggs, meat and milk. Not all of these commodities are equally weather dependent and the prices of some are influenced by where administered prices are set. To attribute the trends in their prices solely to demand-supply imbalances or imported inflation is to avoid the conundrum. Third, when inflation does occur in some food items, be they onions, vegetables or even cereals, the rate of inflation tends to be extremely high, pointing to the role of speculation in driving prices in the short run. Finally, even when such influences are not at work there seem to be factors operative that keep the “all commodities” inflation rate high.

Even though it is still early to say, the trend over the last one-and-a-half years suggest that there are structural factors at work that are setting a higher floor to the inflation rate. They may be neutralised in the future. But even if they are, they could as well return to play a role subsequently. The government has recognised this structural, inflationary tendency in a peculiar, in fact patently absurd, way. It attributes the inflation to the demand-side effects of high growth. If people are richer because of an 8-9 per cent growth rate, they are bound to demand more. Since supply does not adjust, prices are bound to rise.

There are many assumptions here. That when GDP grows, those who need to buy and consume more cereals, pulses and vegetables garner a reasonable share of the benefits of that growth. Or that when GDP grows, the growth does not occur in large measure in the commodity producing sectors, or even if it does this happens only with a significant lag. That even though the “high growth” era began in 2004, it is only now that it has generated demand-supply imbalances. And, that if there is indeed a supply-demand imbalance the government is constrained, for whatever reason, to redress it by resorting to imports. Making such assumptions is not just wishful thinking, but avoiding the conundrum.

It is not that there are no demand-supply imbalances. India’s growth has indeed been lopsided. As has been argued by perceptive analysts, India’s high GDP growth was recorded in a period when the agricultural sector and a range of petty producers were experiencing a crisis, an aspect of which was the non-viability of crop production and therefore an extremely slow growth of agricultural output and GDP. At some point that long-term crisis, was likely to result in an unsustainable demand-supply imbalance.

But there are two other factors that are structurally embedded in the economic environment generated by the government’s neoliberal reform agenda adopted for two decades now. The first is a tendency where corporate consolidation in production and trade, decontrol that permits profiteering, a reduced role for public agencies and public sector firms and the withdrawal or curtailments of subsidies on a range of inputs, has pushed up costs and prices (including administered prices) substantially. As some have argued, India is increasingly a high input price and high output price economy, with a rising floor for many prices. The second is the role that speculation has to come to play, with liberalised trade, with the presence of large corporate players in the wholesale and retail trade and with the growing role of futures and derivatives trading in a host of commodities. Add the influence of these two factors to the underlying crisis in some commodity producing sectors and the long-term, structural inflation is more than partly explained.

The government of course does not consider these angles worth pursuing. The reason is partly ideological. It cannot bear questioning the outcome of reform. It cannot bear suggesting that corporate entry can lead to profiteering in a context of decontrol. It does not believe that speculation in futures markets can push up spot prices, and has banned some of these markets only because of public pressure. It cannot contemplate a larger role for the state and no role for corporate (domestic and foreign) players in the both wholesale and retail trade. In the event, all that the Prime Minister’s emergency meetings on the inflation issue could throw up is an inter-Ministerial group mandated to monitor short-term fire-fighting measures and promote actions that the government has claimed to be promoting for many years now.

What is more, in the midst of all this, on the basis of the liberalised pricing mechanism, the oil companies have been allowed to hike the prices of petrol a second time in quick succession. Given the role of public sector firms here, nobody would believe that a nod from the government was not obtained before the hike. If balance has to be maintained a diesel hike must follow. This government may go in for that as well. Doing this to the prices of what are universal intermediates in the midst of an inflation emergency might be seen by some as madness. If the belief that the people can be called upon to sacrifice real incomes because reform cannot be held back or reversed is a sign of madness, then possibly it is.

Growth and Impoverishment

By: Prabhat Patnaik

NOT a day passes without some official spokesman or the other recounting India’s high growth performance and promising to better it in future. The rate of growth of gross domestic product has got elevated to being the sole criterion for judging the country’s economic achievement. True, large masses are still afflicted by poverty, malnutrition and abysmal living conditions, but that, the official argument states, is only because the fruits of this growth have been unevenly distributed; if the rate of growth is further increased, and if a better spread of its beneficial effects is ensured, then these problems will disappear. About the beneficial effects of GDP growth, however, they scarcely have any doubt.

WRONG PERCEPTION

This perception which has many adherents is plain wrong. There can be alternative ways of achieving economic growth, and the social impact of growth depends upon how it is achieved. The growth process currently underway in the Indian economy, which is rooted in India’s neo-liberal policy dispensation, is necessarily of a kind that impoverishes in absolute terms the bulk of the working population. Its celebration is unwarranted. An acceleration in the rate of this growth, as long as its nature remains unchanged, will only further increase the degree of absolute impoverishment. And, given the nature of the current growth process, ie, within the overall ambit of neo-liberalism, efforts to make this growth “inclusive” through various measures of “social protection”, such as the NREGS, will be necessarily limited, transitory, and, at best, restrictive of the pace of absolute impoverishment without reversing it.

I am not resorting to hyperbole. The empirical evidence for absolute impoverishment in the recent period of high growth is overwhelming; and the reason for it is also fairly straightforward. Let us look at the evidence first. The official criterion for the identification of poverty (until it was changed recently after the Tendulkar Committee report) has been the intake of 2400 calories or less per person per day in rural India and 2100 calories or less in urban India. By this criterion, poverty has certainly increased: direct measurement of calorie intake suggests that 74.5 per cent of the rural population was “poor” in 1993-4, and 87 per cent in 2004-5; the corresponding figures were 56 per cent and 63 per cent respectively for the urban population. (These figures, based on NSS data, are from Utsa Patnaik, Economic and Political Weekly, Jan 28-Feb 4, 2010, and their veracity cannot be questioned).

Foodgrain absorption figures confirm this conclusion. Per capita foodgrain absorption (defined as net output minus net exports minus net increase in stocks) which, in round figures, was 200 kilograms per annum in “British India” at the beginning of the twentieth century declined drastically to less than 150 kilograms by the time of independence. Strenuous efforts by successive governments in independent India raised it to 180 kilograms by the end of the eighties; but there has been a decline thereafter, marginal at first but precipitous after the late nineties, so much so that per capita foodgrain absorption in 2008, at 154 kilograms by FAO estimates, was lower than in any year after 1953. The period of high growth is precisely the one associated with reduction in foodgrain absorption, and hence with significant absolute impoverishment.

Two arguments are typically advanced against the identification of reduced foodgrain intake with increased poverty. The first states that there tends to be a diversification of consumption away from foodgrains as incomes increase, so that reduced foodgrain intake signifies, contrary to my claim, a qualitative improvement in the consumption basket, and hence in living standards.

This argument however is wrong. With increased incomes, the direct consumption of foodgrains may go down, but the indirect consumption of foodgrains, as processed food (such as cornflakes) or as feedgrains for animal products (such as mutton, pork, chicken etc) goes up; as a result the total absorption of foodgrain per capita, direct and indirect taken together, increases. In the US for example the per capita total absorption, direct plus indirect, of foodgrains is 900 kilograms per annum compared to India’s 154 kilograms. In fact, comparison across countries shows that almost 55 per cent of the observed difference in per capita total foodgrain absorption is “explained” (statistically) by per capita real income difference. Hence reduced foodgrain absorption is indicative of large-scale absolute impoverishment.

The second argument states that the reason for reduced foodgrain intake even among lower income groups is larger expenditure on other things, in particular healthcare; and this is indicative of changing “tastes”, associated with an improved quality of life, and hence economic betterment.

The fallacy of this argument lies in its underlying assumption that anyone, even a poor man, compares at the margin the satisfaction to be derived from consuming more food with that from taking his child to the hospital when the child is ill. This assumption is wrong. In most people’s perception the latter has absolute priority. Since this perception could not have emerged suddenly over the last decade, when per capita foodgrain absorption declined precipitously, the cause for this decline is likely to be a rise in healthcare costs over this period.

Such a rise has certainly been a feature of the neo-liberal era, owing to increasing drug prices and privatisation of healthcare. Hence, the fact that expenditure on healthcare has gone up even at the expense of food intake in the last decade, can only be indicative of impoverishment, rather than of an improved quality of life.

DECLINING PURCHASING POWER

The basic reason for this impoverishment is reduced purchasing power in real terms in the hands of the bulk of the working population, which in turn is due to two phenomena. First, the growth process has been accompanied by what Marx had called a process of “primitive accumulation of capital”, whereby vast numbers of peasants, petty producers like fishermen and craftsmen, marginal groups like the tribal population, suffer either outright dispossession or a squeeze on their real incomes, for the benefit of large capitalists, speculators and the financial interests.

Big retail chains come up to displace petty traders; agribusiness comes in to squeeze the peasantry; land grabbing financiers come in to displace peasants from their land for real estate and spurious infrastructure projects; tribal people are evicted to make room for mining projects; and petty producers of all descriptions everywhere get trapped between rising input prices caused by the withdrawal of State subsidies and declining output prices caused by the withdrawal of State protection from world commodity price trends. When we add to all this the rise in the cost of living, because of the privatisation of education, health and several essential services, which affects the entire working population, we can gauge the virulence of the primitive accumation that is unleashed.

This process of primitive accumulation is at the same time unaccompanied by any significant increase in the employment of wage workers (as distinct from white collar professionals) in the capitalist sector. This is because of the rapid rate of technological and structural change that a changing demand pattern, owing to rising income disparities, generates in a “liberalised” economy. Hence the victims of primitive accumulation cannot get absorbed as wage-workers under capitalism. They either join the reserve army of labour, or linger on in their old occupations, taking a cut in their real incomes in both cases. Besides, this very fact of a swelling labour reserve also keeps the wages of employed workers low, even as labour productivity rises, contributing further to the growing income disparities.

Any acceleration of growth simply reproduces the problem on an even larger scale. The displacement of tribals and peasants occurs on an even larger scale, the expropriation of petty producers occurs to an even greater extent, while the rate of growth of labour productivity in the organised capitalist sector increases with increased growth rate, keeping labour absorption into this sector as constricted as ever. The view that with a higher growth rate poverty will be eradicated remains a chimera; poverty on the contrary only increases with the growth rate.

And the constraint on public expenditure, typical of neo-liberal economies, where tax concessions reduce revenue and “fiscal responsibility” legislation curbs government borrowing, ensures that “social protection” measures remain both anaemic and amenable to sudden, arbitrary and sporadic cuts. Growth under the neo-liberal dispensation therefore, far from being a condition for the amelioration of poverty, becomes an instrument for the impoverishment of large segments of the working population.