The trickle-down problem in India’s inflation story

India’s poor face much higher inflation than the rich due to higher spending on food items


Headline inflation numbers tell us little about the burden of prices being faced by different segments of the population. Photo: Priyanka Parashar/Mint
Headline inflation numbers tell us little about the burden of prices being faced by different segments of the population. Photo: Priyanka Parashar/Mint

At a time when industrialists and bond markets are expecting rate cuts by the Reserve Bank of India (RBI) in a low-inflation environment, central trade unions cited curtailing price rise as a major demand in calling an all-India strike earlier this month. What explains this dichotomy? Are unions being obdurate in refusing to acknowledge the basic statistical fact that at 5.1%, inflation is much lower today than what it used to be (8% plus) before the Narendra Modi government took over in May 2014?

A Mint analysis based on inflation and consumption statistics shows that the answer to this question is not so simple.

Headline inflation numbers tell us little about the burden of prices being faced by different segments of the population. This is because consumption baskets vary drastically across different classes. Poorer people spend a larger amount of their earnings on food, while the rich would spend more on things like consumer durables and services. So the poor would be hurt more if prices of items like pulses or vegetables go up, while they would gain little if smartphone or airline tickets prices come down.

All this is fine at the level of analogies, but is there a way to measure it? Mint has tried to address this issue by marrying consumption expenditure statistics given in the National Sample Survey Organisation (NSSO) with disaggregated inflation figures for different commodities and services.

The results can help us understand the class-difference in perception about the inflationary scenario. The overall price rise for rural poor in India has been five percentage points more than what it has been for the urban rich since the Modi government took over in May 2014.

Things have been getting worse over time. Before the dip in inflation numbers in August, 2016, the gap between year-on-year inflation growth faced by rich and poor people in India was at an all-time high since March 2015.

How did we arrive at these estimates? The India Human Development Survey data shows that 55% of India’s richest people (top 5%) were living in urban areas and the rest were in rural areas. Similarly, 85% of India’s poorest people (bottom 5%) were living in rural areas. The NSSO report on consumption expenditure provides fractile class-wise consumption shares of various items for both rural and urban areas. To get to a representative consumption basket for rich and poor categories, we take the relative weights of consumption shares for rural and urban areas for rich and poor.

Also Read: WPI inflation rises to 3.74% in August

For example, the share of food consumption for urban rich is 23.35% and rural rich is 40.95%. So, the adjusted share of food consumption for our rich category would be 31.26%. These weighted consumption shares are used with all-India consumer price index (CPI) series to calculate inflation growth for the rich and poor. This exercise became possible only when disaggregated prices were made available from March 2015 onwards.

While a sharp decline in vegetable price inflation might have brought this gap down in August, food inflation worries top concerns about the rise in prices of major commodities. The latest inflationary expectation survey conducted by the RBI in June 2016 provided evidence of that.

This in the context of the greater share of food consumption for poorer people has an effect in terms of overall inflationary expectations. White collar employees such as financial sector workers had a lower expectation of rise in inflation in comparison to manual workers, the survey showed.

Seen in this context, it is barely surprising that corporate India is demanding rate-cuts on account of low inflation, whereas India’s working class is protesting against rising prices at the same time. While it might be tempting to dismiss the protest by trade unions as obduracy in the face of much lower inflation than what it was a couple of years ago, their demands seem to be rooted in day-to-day experience rather than polemics.

The writing on the wall is clear. The agreement between government of India and RBI to keep inflation under check has been praised by many commentators and economists. However to make sure that the gains of a successful battle against inflation reach the poor as well, the battle would have to be fought on multiple fronts. Agriculture ministry and India’s farms should be the first focus.

Also Read: The narrowing gap between wholesale and retail inflation

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