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