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06.01.2011

(Un)Common Suffering: Distributional impact of recent inflation in India

Rajarshi Majumder and Subhadip Ghosh*

Introduction

The Indian economy has been under a severe and consistent inflationary pressure for the past couple of years. While the inflation rate (point to point, WPI) was 4.5 per cent in January 2008, it increased to 12.8 per cent by August 2008. It was followed by a period of low inflation till October 2009. But from November onwards prices were on an accelerating trend again and by April 2010 inflation rate touched 11 per cent, hovering thereabout since then. This is in sharp contrast to most of the 2000-2005 period when inflation rate hardly ever crossed 7 per cent, and the last time inflation crossed double digit was in May 1995.** Therefore, the recent increase in rate of inflation is quite striking not only because of the peaks, but also because it appears to be a consistent phenomenon.

As it has snowballed into a social crisis and a possible election issue, there has been a flurry of writings from various quarters over the last year or so regarding the reasons behind it, the impacts, and possible policy suggestions. It seems that the inflation during 2008-09 was quite different from the most recent one. While the increase in inflation rate during 2008-09 undoubtedly had a global link associated with rise in the prices of mineral oils, metals, and food grains globally, this time around, inflation does appear to be an India-specific phenomenon, as there are no major global factors at play. In addition, researchers have also argued that instead of countering the global trends, our domestic policies, especially those related to money supply, had consolidated and stimulated the inflationary trends during 2008 (Marjit, 2008), whereas the current phase of rising inflation is in the face of tight money policy. Moreover, though inflation is supposed to weaken the purchasing power of a currency, recent inflation in India has been accompanied by the rupee’s relative strengthening against international currencies, especially the US dollar. This suggests that current inflation is more a structural problem arising from supply side constraints both on the production as well as distributional fronts, especially in food commodities. It appears that factors like lack of capital formation in agriculture, withdrawal of the State from irrigation and extension activities, speculation & commodity trading with a practically non-existent Public Distribution System, have also contributed to the crisis. Some economists have been consistently pointing out that domestic policy lapses in these areas are the main reason behind persistent and increasing rates of prices (Chandrasekhar, 2008, 2010), but their arguments seem to be falling on deaf ears.

While there has been no dearth of macroeconomic projections, most of the analysis has been on the growth impact of inflation and almost nothing on the distributional impact (a notable exception has been Ghosh, 2009). The present article focuses on this specific issue of distributional impact of current inflation by quantifying the differential impact of the current inflation on different income groups of the society.

Trends in WPI and CPI Inflation Indices

Inflation rate in India is officially measured through changes in the Wholesale Price Index (WPI). In addition, effective inflation for consumers is measured through changes in the Consumer Price Index (CPI). While most analysis has been based on the aggregate WPI, we are more concerned about price trends in different commodity groups, especially those in the CPI. We therefore look at inflation in three broad groups of commodities - Food, Fuel, and Others.

It is observed that the current bout of inflationary pressure started roughly in December 2007, and WPI Inflation, which had remained in the 4-6 per cent band for a long period of 26 months – January 2006 to March 2008 –climbed up sharply to supra-10 figures, first in June 2008, and then again in February 2010. Food price inflation increased sharply during March-April 2008, crossed double-digit mark in June 2009, reached a peak of 20 per cent in December 2009, and declined marginally thereafter. The inflation rate for the Fuel group was quite high during 2004-05, declined till November 2007, and increased steeply thereafter. It remained negative for most of 2009, but rose sharply again during 2010. Inflation in the Non-Food–Non-Fuel sector was initially low but is increasing and shadowing the WPI inflation in recent past. The most recent figures obtained from the Government of India put the inflation rates at 10.0 per cent (WPI), 10.3 per cent (Food), 14.3 per cent (Fuel), and 8.5 per cent (Non-Food–Non-Fuel) for July 2010.

While headline inflation has been much talked of, the man on the street is more concerned about the price (s)he pays for commodities. Rise in prices paid by the common person is reflected by the CPI. Consumers in rural areas are affected by movements in CPI for Agricultural and Rural Labourers (CPIAL), while those in urban areas are concerned with CPI for Industrial Workers (CPIIW) and CPI for Urban Non-manual Employees (CPIUNME).

Inflation in CPI lagged behind the WPI and started the current northward journey from January 2008 onwards. However, unlike WPI which showed decelerating trend in 2009, CPI Inflation has been significantly high throughout the last four years and instead of slowing down is on the rise over the last few months. This is all the more disconcerting because the deceleration in WPI over most of 2009 was associated with global recession, which led to loss of jobs and decreased income for a large part of Indian populace. Thus, while most incomes remained stagnant, consumer prices were on the rise. Even among the sectors, increase in CPIAL has been greater than CPIIW or CPIUNME indicating that prices in rural areas have increased at a faster pace than those in the urban areas.

At a disaggregated level, rise in CPI for the Food group has been higher than that in overall CPI, especially in the most recent past, seemingly confirming our earlier observation that the present inflation is a supply side problem. CPI for Fuel showed a decelerating trend till April 2008, and has been erratic throughout the period, probably because of the administered prices of fuel. Interestingly, fuel prices in rural areas have increased at a much faster rate compared to those in urban areas. This is due to the greater share of Firewood in the calculation of CPIAL and also due to the nature of the unregulated and unorganised fuel market in rural areas. The recent shift in fuel price policy to a market based regime is expected to be reflected in a more systematic movement in Fuel price inflation in line with global prices. Thus with global crude prices firming up, the common man is going to be hit harder.

What is significant is that inflation has been most severe in the foodgrains group. Since a large part of the consumption expenditure of the majority of people is on food, which has a very low price elasticity, the common man has been affected most severely. Also, because of the low weight of the Food group in the WPI, headline inflation has not revealed the true misery of people.

If we look at the rates of price increase, we find that over the last four years WPI has increased by about 29 per cent (Table 1). Rise in CPI has been substantially higher, with urban price indices rising by around 40 per cent and rural prices increasing by about 49 per cent. Prices of Food have increased the most – more than 50 per cent – followed by Fuel prices in rural areas. It thus transpires that the purchasing power of common people has declined by about 49 per cent in rural areas and more than 40 per cent in urban areas over the last four years. However, this impact has not been uniform; the suffering has been uncommon to some groups, which we explore in the next section.

Table 1: Rates of Increase in Price Indices
Indicator
Weight
Percentage Increase During
July 2006 –
July 2007
July 2007 –
July 008
July 2008 –
July 2009
July 2009 –
July 2010
July 2006 –
July 2010
  WPI     All
100.0
4.9
11.7
-0.1
10.0
28.7
Food
15.4
8.7
6.3
14.9
10.3
46.5
Fuel
14.2
-1.5
17.1
-10.3
14.3
18.2
Others
70.4
5.4
11.8
-1.4
9.0
26.9
  CPIAL  All
100.0
8.6
9.4
12.9
11.0
48.9
Food
66.7
9.6
10.7
9.9
15.6
54.1
Fuel
7.9
6.5
8.5
9.0
14.1
48.9
Others
25.4
6.7
6.2
21.9
14.1
35.3
  CPIIW  All
100.0
6.1
8.3
11.9
13.7
40.4
Food
46.2
8.4
11.8
14.7
17.3
48.9
Fuel
6.4
7.4
6.2
2.1
3.4
19.2
Others
47.4
3.6
5.3
10.5
11.6
34.9
  CPIUNME-All
100.0
6.4
7.4
13.0
14.1
41.2
Food
46.2
9.4
10.0
15.3
9.7
52.1
Fuel
6.4
7.0
6.2
2.1
5.4
22.3
Others
47.4
3.4
5.0
12.3
19.6
33.0
Source: Press Releases of Government of India, Various Issues; Reports on Price Indices obtained from Ministry of Statistics and Programme Implementation, Various Issues. See Note 2.

Distributional Impact: Who are the worst sufferers?

While everyone except speculators are adversely affected by the current inflation, some groups are more so than the rest. At a theoretical level, it has been postulated that inflation favours the profit earners (the rich, mostly) and robs the wage earners (the middle and low income groups). While incomes of the former group are mostly indexed to prices, incomes of the latter groups follow prices only after a lag, and even then they are often not compensated fully. Apart from this textbook rendition of the distributional impact of inflation, effective inflation faced by different socio-economic groups would be different also because of their different consumption patterns. We try to quantify the impact of the recent inflation on different income groups in India.

As price rises are not uniform across commodity groups, effective inflation would depend on the consumption pattern of families. Since the commodity baskets of the lower income groups are different from those of the high income groups, effective inflation rates faced by them are also dissimilar.

Periodical surveys from National Sample Survey Office (NSSO) provide data on the consumption pattern of different economic groups. NSSO data divides the population into Twelve Monthly Private Consumption Expenditure (MPCE) classes and the shares of different commodity groups in total expenditure are provided for each of these classes separately. The bottom four MPCE classes can be taken as the Low Income Group, while the top four can be considered as the High Income Group. The middle four MPCE classes can be taken to represent the Middle Income Group.

Table 2: Consumption Pattern of Indian Households
MPCE Classes
Average MPCE
(Rs per capita)
Shares of Commodity Groups in Total Expenditure (%)
Food
Fuel
Others
Rural – I
195
68.3
13.6
18.1
Rural – II
256
67.2
13.4
19.4
Rural – III
298
61.9
11.3
26.8
Rural – IV
343
60.8
11.7
27.5
Rural – V
387
59.3
11.1
29.6
Rural – VI
433
60.1
10.8
29.1
Rural – VII
482
59.3
10.8
29.9
Rural – VIII
542
58.1
10.3
31.6
Rural – IX
631
55.8
10.2
34.0
Rural – X
775
53.4
9.7
36.9
Rural – XI
1003
49.8
9.1
41.1
Rural – XII
1743
33.7
5.9
60.4
Urban – I
283
64.9
14.3
20.8
Urban – II
368
63.0
13.3
23.6
Urban – III
444
56.7
12.3
31.0
Urban – IV
533
55.3
12.5
32.2
Urban – V
627
52.5
12.0
35.4
Urban – VI
732
50.4
11.8
37.8
Urban – VII
859
48.2
11.4
40.4
Urban – VIII
1010
45.9
10.7
43.4
Urban – IX
1227
42.4
10.1
47.5
Urban – X
1599
38.8
9.0
52.1
Urban – XI
2156
35.6
8.8
55.6
Urban – XII
3943
23.6
6.0
70.4
Rural Low Income
299
67.7
13.5
18.8
Rural Middle Income
468
61.5
11.4
27.0
Rural High Income
927
39.1
7.0
53.9
Rural - All
625
53.3
9.7
37.0
Urban Low Income
445
63.8
13.8
22.4
Urban Middle Income
813
49.7
11.5
38.8
Urban High Income
1985
27.6
6.9
65.4
Urban - All
1171
40.0
9.4
50.7
Source: Authors’ calculations based on NSSO Report No 523, Household Consumption Expenditure in
India 2005-06, GOI (2008)

This enables us to derive the consumption basket of the bottom, middle and top fractile income classes. Using NSSO data for 2006-07, it is observed that Fuel & Light has the lowest share in total expenditure for all the three income groups (Table 2). For the Low and Middle Income people, Food commodities constitute the largest consumption expenditure group, while the largest share of expenditure goes to Non-Food Non-Fuel commodities for the High Income group consumers.

These shares of Food, Fuel and Others in the commodity basket of different classes of people have been used as weights to derive the effective inflation rates faced by the different income groups from the commodity-group CPIs. While CPIAL is used for rural sector, simple average of CPIIW and CPIUNME has been used for the urban sector. This provides us with the Effective Consumer Inflation Rate for the six groups of people considered (Table 3). Since essential items like Food and Fuel feature more prominently in the basket of the LIG people and these items have experienced relatively higher price rise during the study period, effective inflation rates are higher for the poorer section of the people, both in the rural and the urban areas. It also appears that the urban consumers have suffered more erosion of purchasing power during 2009-2010, mainly because of the inflation in Non-Food–Non-Fuel commodities, which feature heavily in their consumption basket. However, it is still price rise in food commodities that hurts people most since these are basic to a decent standard of living.

Table 3: Effective Inflation Rates Faced by Different Economic Groups
MPCE Groups
Percentage Decrease in Purchasing Power During
July 2006 –
July 007
July 2007 –
July 2008
July 2008 –
July 2009
July 2009 –
July 2010
July 2006 –
July 2010
Rural Low Income
8.6
9.6
12.1
12.1
49.9
Rural Middle Income
8.4
9.3
13.1
10.7
48.4
Rural High Income
7.8
8.1
16.3
6.1
43.6
Urban Low Income
7.5
8.9
12.4
13.7
42.7
Urban Middle Income
6.6
8.1
12.1
13.3
40.6
Urban High Income
5.3
6.8
11.8
14.1
37.6
Source: Authors' Calculations.

Over the last four years the impact has therefore been hardest on the lower income people, especially those in the rural areas. It is observed that the purchasing power has declined by about 50 per cent for the Rural Low Income Group people compared to about 38 per cent for the Urban High Income Group people. In addition, since a majority of the lower income groups are wage earners and that too from the unorganised sector, their incomes are not compensated for the price rise. On the other hand, most of the people in the highest income groups are either profit earners or engaged in the organised sector. Therefore, their incomes are frequently indexed to price rise and they are somewhat compensated against the inflationary trends.

If we consider the fact that per capita income has increased by about 40 per cent over the last 4 years (in nominal terms) and assuming (though unrealistically) that this growth has been shared equally by all the groups of people, we still arrive at a fall in real income for five of the six groups considered by us. Only the urban HIG people seem to have had a rise in real income under such restrictive assumption. If we now contemplate the reality that most of the recent income growth have benefited the upper echelons of the society we can easily comprehend the uncommon immiseration of the already marginalized group that has taken place, especially at the countryside.

This has wider socioeconomic implications since the erosion in the purchasing power due to current inflation has been biased against the poor, decreasing their real per capita incomes disproportionately. This has been worsening the already widespread economic inequality in India and this is perhaps the most appalling impact of current inflation. We hope that the present commentary stirs up some thoughtful debate on the wider socioeconomic impact of the distributional effects of the specific type of inflation currently prevailing in India and that appropriate policies are formulated before the resultant inequality goes out of control.

* Authors are Associate Professor and Reader respectively at the Department of Economics, University of Burdwan, India. Authors are grateful for valuable communications with Dipa Mukherjee, Saikat Sinha Ray, and Pinaki Chakraborti. Disclaimers apply. Correspondence: meriju@rediffmail.com.

** Note: Data used in this article are obtained from – RBI Bulletin, various years, [available at http://www.rbi.org, accessed on 12/08/2010]; Reports on Consumer Price Indices for Agricultural & Rural Labourers and for Industrial Workers, Various Issues [available from http://www.labourbureau.nic.in accessed on 28/08/2010]; Reports on Wholesale Price Indices and Consumer Price Indices for Urban Non-Manual Employees, Various Issues [available from http://www.mospi.nic.in accessed on 26/08/2010].

References

Chandrasekhar, C.P. (2008) ''Inflation: How Much and Why'', Macroscan, 17th April, 2008 [available from                               http://www.macroscan.org/cur/apr08/print/ prnt170408Inflation.htm,
                              accessed on 12/08/2010]

Chandrasekhar, C.P. (2010) ''Engineered Inflation'', Macroscan, 2nd August, 2010 [available from                               http://www.macroscan.org/cur/aug10/print/ prnt020810Inflation.htm,
                              accessed on 12/08/2010]

Ghosh, Jayati           (2009) ''Prices and Politics in India'', Macroscan, 24th March, 2009 [available from                               http://www.macroscan.org/cur/mar09/print/
prnt240309Prices_Politics.htm,
                              accessed on 12/08/2010]

Marjit, Sugata           (2008) ''Inflation and Public Policy: Contemporary Dilemmas'', Economic and Political
                              Weekly, Vol. 43, No. 36 September 6, 2008.

 

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