Inflation and the poor

Inflation and the poor
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First Published: Wed, Feb 21 2007. 12 38 AM IST
Updated: Wed, Feb 21 2007. 12 38 AM IST
The sort of well-heeled folk who visit Café Economics would not raise an eyebrow if the price of one of our cappuccinos were increased by 10%. They spend only a minuscule portion of their incomes on coffee, their incomes are growing smartly, and the value of their investments in shares, mutual funds, and houses has tripled in the past five years.
Inflation is not yet a problem for them—as yet.
But look elsewhere, and you will see inflation biting into family budgets with heartless intent. The economic boom has not lavished its benefits on everyone with equal generosity. How must the poor be managing their lives in the wake of rising inflation? A quick look at some numbers tells us a lot about how inflation could be pushing millions back into poverty.
A farm labourer who does transplanting work was likely to earn about Rs62 a day in July 2004, according to data from the ministry of labour and employment. He would have got around Rs50 a day for the same work in July 2000. So his wage rate has increased at a compounded rate of 5.42% in those four years.
Let us assume that this poor man gets work for a hundred days a year. His annual earning from transplanting would be Rs6,200 in 2004. His wife and children would earn even less than him—their daily wage rates were Rs50 and Rs35, respectively. This family must be living at the edge of desperation. Their joint income must be just enough to buy the 2,000 calories required for sustenance.
A large part of their income must have been spent on food. And the good thing is that food prices were pretty stable in these years. The consumer price index for agricultural labourers, a measure of the cost of living for the poor, grew at an average rate of 2.06% between 2000 and 2005. So here’s the good news: The wages of a farm worker at the very bottom of India’s income pyramid were increasing faster than the cost of the goods he bought. Perhaps his family was starting to generate small surpluses to spend on basic consumer goods—a bar of soap, a cheap radio, a packet of biscuits. Perhaps the children were being sent to school.
To restate all this in the language of economics: real wages of farm workers rose between 2000 and 2005.
The inflation index for farm labourers is now rising at double digit pace. The prices of most cereals, vegetables, fruit and condiments have shot through the roof. If one assumes that the income of farm workers is still rising at the 2000-05 rate of 5.42% a year—though it could be more—then the balance between wages and inflation has shifted. Prices are rising faster than incomes.
Real wages could be dropping for the very poor.
That is why I am appalled when some economists try to turn a blind eye to rising inflation, arguing that it is a small price to pay for higher growth. It could be true for you and me, with our indexed salaries and the cushion that our wealth gives us. Double-digit inflation, as I have tried to show, can be a human calamity for people living less comfortable lives. And so the inflation story is not only about middle-class housewives in Dadar and Karol Bagh stung by onion prices; it is also about the quarter of our fellow citizens who live on the edge of brutal poverty. This round of inflation may have set them back by many years.
We were taught by our teachers of undergraduate economics about how inflation distorts the economy in many ways. It hurts lenders, it helps borrowers, it is taxation by stealth and it hits the poor more than the rest of us.
We should be wary of high inflation—or any inflation at all, as former US Fed chairman Paul Volcker reminded us in Mumbai last week—not because it looks bad in anybody’s macroeconomic report card, but because it hurts the poor.
Think about it: What would you do if prices were rising faster than your salary? So let’s not take the inflation threat lightly.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Wed, Feb 21 2007. 12 38 AM IST
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