Current Inflation – Analysis & Policy OptionsNovember 8th, 2008
Round Table Discussion – ‘Current Inflation – Analysis & Policy Options’ by Prof. Arun Kumar – Professor Social Science, Centre for Economic Studies & Planning, Jawaharlal Nehru University; Ms. Mythili Bhusnurmath – Consulting Editor Economic Times; Mr. Sudershan Banerjee – MD, India Market Business Advisory, imbA; Mr. Paranjoy Guha Thakurta – eminent TV Journalist and Dr. S.R. Bharucha – President – Recont Associates and Former United Nations Commonwealth Adviser; in Espire, Rai Foundation, A41, MCIE, Mathura Road, New Delhi – 44.
- There are extreme swings that are taking place in the economy and inflation. In the Indian context, inflation remains a very, very important issue because we have a very large unorganised sector that gets hit even if the inflation rate is 5%.
- Why is inflation very important? Because it has a differential impact on various sections of the society. We have to understand in what way are they different, for which section it is beneficial and for which inflation is detrimental.
- In India today, we have an organised sector and an unorganised sector as far as employment is concerned. The organised sector is roughly about 6.5%; the unorganised sector is about 93.5%. The organised sector has some kind of indexation so it can try and get a higher wage as the price rises but the unorganised sector has no way of doing that.
- Very often when we say that the rate of inflation has gone down, people think prices will start going down. That is not correct. Inflation is the rate of rise of prices. So inflation coming down only means the rate at which the prices are going up is coming down.
- There are different ways of thinking about inflation. One is to look at wholesale prices; how wholesale prices have risen, another is consumer price indices, which affect the individual. Wholesale prices affect the manufacturing processes etc. but then how it filters down to the consumer is caught by the consumer price index.
- The country is stuck with the wholesale price index as to measure of inflation. Even though we know that is not something that is directly relevant to the consumer, still there is some reflection. Throughout the world, inflation is measured in terms of the prices of final demand, not the intermediate demand. The prices, which wholesale price index collects, are ex-gate price, ex-factory price, and ex-mine’s price. How is this affecting the common man? A common man has no relation, if it is ex-gate price where the farmers are selling at the gate, that price; it has no relevance to the final demand.
- Is our inflation rate today, wholesale or consumer price index representative of inflation? It depends on the consumption basket that we have. But the consumption basket has changed dramatically in the economy. Earlier, the services sector used to be only 30%, but today it is almost 60% of the GDP. But in our wholesale price index, there is no reflection of services.
- We have poor, very poor; lower middle class, middle class and then the well-off sections and their consumption bundle is different from each other. It is therefore hard to tell who is an average or common person. 96% of India lives at less than Rs48 per person per day.
- There is another problem. What is technically called the base is changing. This is the base on which we calculate the inflation. That keeps changing because the consumption patterns are changing. People are consuming things that they did not consume twenty years back. The middle class, even though its income has gone up, is under pressure because it wants to consume far more than what it has. The consumer feels challenged. It is here that inflation really hits and that is why the middle class is very upset when prices go up.
- As for the supply side and demand side factors. Some people say supply is inadequate and, therefore, the prices are going up. It is like a bottleneck. Supply is like a bottleneck and, therefore, prices begin to rise. Or, some say demand is rising too fast and that is why the prices are going up. Both these kinds of theories exist in the economy, supply side and demand side. There is another kind of theory, which is that there is conflict in society. What is this conflict in society? Everybody is trying to get more, spend more and everybody wants higher income. So to do that, we are trying pressurise the government and other sections to get more.
- There is impact on the growing services sector. Everything requires services. When the farmer on the Punjab farm produces potato and he sells it for Rs2 a kilo, in Delhi by the time it comes here, it sells for Rs10 a kilo because the services sector has added a huge margin. And this is true of almost everything since in the economy now, 60% is services.
- There is technically something called a flex price market and a fixed price market. What does it mean? Agriculture is a flex price market because the prices go up and down and that is why we have seasonal adjustments. Then there are fixed price markets where the industry fixes the price and it is called marker pricing. Therefore, the behaviour of the prices in agriculture and in non-agriculture is very different. When one thinks of inflation, one has to bring that together.
- There is wage price spiral. Whenever trade unions are strong they can demand a higher wage as prices rise. When that happens, the world over, this results in inflation.
- There is a strong link of the inflation with the black economy. What is this black economy? We make extra income. To make those extra incomes, where do we go; we get black premia. There are many links of black economy to inflation.
- Then there is a link with globalisation, through exports and imports. What is happening to export and import prices becomes very important. Markets have opened up with globalisation. When this happens, foreign influences come in very quickly.
- Globalisation has brought in the consumerist influence. With globalisation has come the idea of consuming beyond one’s own means through credit cards and various other mechanisms.
- Government policies are very, very critical because inflation, at the end of the day is a macroeconomic phenomenon. While we all feel it is a microeconomic phenomena but also has very strong macroeconomic dimension.
- The role of the PDS remains very important. The impact of the public sector is very, very important because the public sector plays the role of controlling prices. The price setting behaviour is effected by the public sector.
- There are positive effects of privatisation because the competition has increased. For instance, cell phone rates have come down. However, there are also negative effects because monopolies have been created and these monopolies are able to charge prices much higher than what could have been charged earlier. Also the public sector is in retreat and that has also enabled the prices to rise.
- A lot of people would think a 7% growth is not a slowdown at all and that we have really got stars in our eyes after seeing 9% and say that 7% is a sustainable rate of growth for India. Anyway, there is a general perception that as compared to 9%, we have definitely slowed down.
- All parameters do indicate that going down further we will see some kind of slowdown whether in exports, whether it is imports sector growth, whether it is industrial production etc. So what do we need to do? How do we balance these things? Given the fact that growth is slowing, we are not very sure, but we need to be sure, is inflation slowing, rising or has it plateaued? We need to take a call before we decide what kind of growth balance we need to have.
- We need to know what is the correct measure of inflation. Because whatever policy we initiate, it will be effective only if the data that we have is correct. A lot of our data is collected in a very bad fashion; it is frequently revised so any policy measures if you take are greatly conditioned by the fact that your basic data itself is not very trustworthy.
- In a country like India, you can never afford to ignore food inflation for the simple reason that even though WPI, suffers from a number of drawbacks particularly because it does not have the services, but services frankly are not really consumed by the class of people who are the mass in this country. And let us be very clear that in a democracy, they are the people who count. We need to distinguish between food inflation and all commodities. If we look at what is the worrisome part, it is that while all the commodities are coming down, food inflation is still trending up.
- What do policymakers do? Do they go in for expansion in monetary policy? This is what the government seems to be tempted to favour at the moment. In the West, the banks have stopped lending, the same idea has been transplanted to India and there is this belief that banks in India have also stopped lending. But if you look at the credit figures, there clearly is no decline in bank lending but there is a short-term problem of liquidity.
- if you look at the data on inflation and at the rates of interest, the real rate of interest is already negative. Corporates are crying murder simply for the reason that they have got used to having interest rates very low. The problem is the corporates need to rethink their strategies. There is a slowdown and you need to rejig. The government does need to support corporates to some extent because if corporates really close down their factories, you are going to run free on the streets.
- In the corporate world inflation is a double-edged sword. It works two ways. The first thing that happens is consumers downgrade themselves into lower price products. And in certain segments of the industry like high-ticket items, we either postpone or abandon our purchases. The second part, which is a good one, is that it forces the corporations to introspect. They start investing in understanding the way the real market place works. How your market behaves, who are your customers, who are your consumers, what sex they belong to, what type of lifestyle they have, all the details that is needed. In the marketplace, apart from knowing how the markets are behaving, it is on a continuous basis, they do put the products and the services at all price points of attaching value to each price point. The third area they work is on supply chain optimisation.
- Smarter organisations have a people plan, which is flexible and modular where 70-80% of their people are on their payrolls, whereas 20-30% of people working for them are in a modular structure outside their payrolls, but are taken care of. Organisations have done that now but they don’t do that very well. Good organisations ensure that there is no difference in the qualities of people but you have a modular cost structure.