At a time when consumer price index (CPI) inflation has remained above RBI’s upper tolerance level of 6% for seven consecutive months and WPI inflation rates are at higher since January 2007, it is good that the issue has finally been debated in parliament. and the recent RBI rate hike signals acknowledgment of concern. However, during the debate in parliament, the treasury bench widely felt that there was no inflation in the country. If we ask the richest 1% of the country who own 73% of all wealth, of course it will not affect them. Inflation disproportionately affects the poor, middle class and rural areas.
Demand in the rural economy was under strain even before the pandemic due to global lockdowns and disruptions. When we look at the inflation data, we see that the CPI has been rising at a higher rate in rural areas than in urban areas since December 2021. This becomes more concerning due to high unemployment and falling unemployment. rural wages. Recent data shows that despite the decline in demand for labor under MGNREGA, labor provided under the program is 27% higher than labor provided in June 2019. This clearly indicates a strong household reliance on MGNREGA in lack of job opportunities. Nominal rural wages have also not increased in the current fiscal year, while real wage growth is below the current rate of inflation, resulting in lower net income. This has led to growing indebtedness in rural India. In 2021, rural debt at 84% was almost double urban debt at 42%.
A sharp increase in the prices of basic products such as LPG, vegetables, gasoline, etc. dramatically increased the cost of living for urban households while decreasing their purchasing power. Among urban households, the urban poor constituting 20% of the population probably suffered the most. According to CRISIL, actual inflation for the urban poor was 6.3% in January 2022, 0.4% higher than the richest 20% of households in urban India.
While government programs such as the LPG subsidy or the PDS create some cushion against inflation, they exclude the middle class. For example, the LPG subsidy only extends to 9 crore beneficiaries under the PMUY scheme, leaving about 16 crore middle-class households to bear the high cost of gas cylinders.
According to the RBI, the country’s gross savings increased from 29.4% in 2019-20 to 27.8% in 2020-21. In addition, household net financial assets (% of GDP) fell to 6.9% in the second quarter of 2021-22 from 10.6% in the second quarter of 2019-20. At the other end, financial liabilities (% of GDP) increased to 3.2 in Q2 2021-22 from 1.9% in Q2 2019-20.
Current inflationary pressures are not entirely imported. Fuel’s contribution to the CPI basket is only 10.5%, with the maximum contribution coming from food inflation which is around 40%. In the food inflation basket, vegetables contributed the highest share at 33.3%. When we examine the causes of high vegetable prices, we find that supply-side factors, such as lower availability due to unseasonable rains, heat waves and higher transport costs – all domestic – have added to the pressure on food crop prices. Therefore, much of the current inflation is due to domestic supply-side factors and needs to be resolved domestically.
Due to the pandemic, around 200 million people have fallen into poverty. With current inflation, this number will increase. Therefore, a structural resolution of the problem is essential.
Given that food inflation is at the heart of current inflationary pressures, changes in monetary policy by tightening interest rates alone cannot have much impact. This can further aggravate rural distress and growth. Moreover, with the current volatile geopolitical situation, a weakened rupee and more expensive imports, the additional cost to the treasury will be high. Therefore, a roadmap for fiscal policy consolidation is needed to rationalize non-capital spending.
India wastes about 40% of its agricultural production. To minimize this, now is the time to implement end-to-end integrated “farm to market” micro cold chain systems. The government should conceptualize a national mission to establish such cold chain systems not only to mitigate current inflationary pressures but also to mitigate future seasonal variations in vegetable inflation. Moreover, it is no secret that climate change is altering weather patterns, directly affecting 55% of the country’s food basket. Therefore, it is high time for the country to increase its investments in climate-resilient agricultural practices and adopt a coordinated institutional framework to reduce production uncertainty.
Finally, to ensure that the burden of inflation is not borne by the poor, free distribution of rations should extend beyond November and PMAY houses should be sanctioned for all. In addition, projects like the one in Odisha “Biju Swasthya Suraksha Yojana” in which health is insured and not just insured, should be extended to all citizens.
All of this would reduce the heavy out-of-pocket expenses of households, especially at the rural level. This would not only reduce the distress of rural households resulting from inflationary pressures, but also give them space to explore other livelihood ventures to bolster their incomes.
(Dr. Amar Patnaik is a Member of Parliament, Rajya Sabha from Odisha; a former CAG bureaucrat and a lawyer.)
Disclaimer: These are the personal opinions of the author.