Last week, the release of official Wholesale Price Index (WPI) for May showed that inflation is once again beginning to accelerate and is just a shy away from double-digit levels (the final figures for March reported inflation at 9.68% as opposed to the provisional estimate of 9.04%). The Reserve Bank of India’s action to increase the policy rate, the 10th since March last year, only reaffirmed that these fears were not unfounded.
The focus of the debate, so far, has been on the fallout of a macroeconomic shock such as inflation will have on the country’s growth momentum. Legitimate while they are, it is also a fact, though not discussed widely, that rising inflation, especially in new India, has serious connotations for poverty and inequality. This political economy of inflation cannot be ignored or wished away; failure to address it (but, first you have to acknowledge it) can hold disastrous social consequences, which can do much more to derail the country’s ongoing golden run than declining investment. The fact that this has not got the kind of attention it deserves is ironic, because it is the courtesy of the Congress-led United Progressive Alliance (UPA) that the focus of national discourse has come to be defined around “inclusiveness”.
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All the more since inflation, over the last two years, has been concentrated in food products and is now spilling over into manufactured products. What a price increase does is to erode purchasing power of the people—the same amount of money buys lesser goods. As we go down the income demography, where spending on food dominates household budgets, the erosion is faster with the obvious conclusion that the poor are the worst off.
The experts—citing a thin or large sample, consumption and income-based measures and so on—can debate till the cows come home, but it is a fact that at least one in three Indians live below the poverty line (BPL). (It is another matter that the BPL is estimated as those earning less than Rs 20 a day; not only does it sound like an underestimate, one wonders how those earning Rs 21-30 a day are not considered poor and worse, how easily they can fall back into officially estimated poverty.) In other words, somewhere upwards of 300 million people are officially poor, while there are several millions who can slip in and out of poverty.
The problem of inflation and poverty is not new, but has multiplied in recent times. While the poor continue to be at the receiving end, the so-called not-so-poor have become extremely vulnerable to economic shocks. That is, their inability to absorb the fallout inevitably pushes them back into BPL.
Data is still hard to come by, but there are studies indicating that these are not just apprehensions. An illuminating piece written by deputy chairman of the Planning Commission Montek Singh Ahluwalia in the Economic and Political Weekly (EPW) dated 21-27 May and titled Prospects and policy challenges in the Twelfth Plan reveals the good news that poverty levels have fallen from 37% in 2004-05 to 32% in 2009-10. However, Ahluwalia also quotes a study which estimates that poverty was actually down to as much as 29% in 2007-08—in other words, in two years another 33 million were added to the list of the poor.
Not only is the absolute number staggering—it is equal to the population of some countries—it also shows how vulnerable the poor are to economic shocks. The two-year period is also when the global economic shock, originating in the US, struck; average WPI inflation almost doubled from 4.5% in 2007-08 to 8% in 2008-09. The impact on poverty also flies in the face of the claims made by policy wonks that India was insulated from the global economic shock; unless of course the poor are not part of their analysis.
What is probably exacerbating the impact of inflation is the lack of a performing public distribution system (PDS) and growing inequality in Indian society—in fact, Ahluwalia puts up a graph in his EPW paper which shows that inequalities among states has been growing steadily since 1988-89; coincidentally also the phase when the country gradually shifted its growth trajectory. Significantly, the states—Bihar, Uttar Pradesh, Orissa, Jharkhand and Madhya Pradesh—which report the highest poverty are the ones where the PDS performance is abysmal.
This trend is probably not on our radar because like so many things about new India, class is also rapidly fragmenting. So the consequences of inflation varies across classes. Hence, their resentment, unlike in the past, is less likely to be defined around one pan-India issue. While an Anna Hazare can grab national headlines for his fight against corruption, an issue that has huge traction with the middle class, the ongoing protests by locals, as it poses a threat to their livelihood, against the land acquisition to set up the Posco plant in Orissa only draw sporadic coverage, often with rhetorical overtones.
It is clear then that macroeconomic shocks such as inflation and recession can now cause social destabilization one could not have imagined earlier. It is, therefore, time for the UPA to walk the talk.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org