The impact of rising prices on investors and the salaried class

What do the inflation numbers show?

Retail inflation, which peaked at 6.95% in March 2022 as against 6.07% in February 2022, has been the highest in 17 months. Food and beverages inflation, which constitutes 45.86% of the CPI basket of commodities, surged to 7.47% in March 2022 against 5.93% in the preceding month. Fuel prices increased only towards March end. As such, it’s impact on inflation would be felt only in the near future. Core inflation, which excludes food and fuel prices, was 6.53% in March 2022. This also does not paint a pretty picture for the country. Wholesale inflation was 13.11% in February 2022 against 12.96% in January 2022.

How would it impact the Indian economy?

Rising retail prices, especially of food and vegetables, would pinch the common man and adversely impact consumer spending. Since fuel prices rose at the end of March, broad-based second round price pressures are likely to be triggered. Revenue expenditure of both the Centre and state governments is bound to increase, consequent upon the rise in dearness allowance (DA), or cost of living adjustment allowance, thereby worsening the fiscal deficit. Firms are likely to be impacted, too. Their expenditure under compensation for employees would rise. Thus, higher inflationary pressures could prove to be a dampener for the economy.

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How is the salaried class compensated?

The government and the organized sector have a well-structured system to protect the interests of employees by compensating erosion in purchasing power through a formula that mandates a proportionate rise in the DA against the rise in CPI-based inflation. However, individuals who earn their livelihood through the informal sector suffer because of inflation.

Why does inflation encourage investors?

Inflation within a manageable rate of 4-5% helps boost the economy as redistribution of income works in favour of investors. The salaried class is compensated through variable DA, but it is practically not possible to work with up-to-date data. DA for April has to rely on the latest CPI, which reflects the price level of the previous month. However, the ever-increasing prices of products lead to a continuous expansion in profit margins and this encourages investors to increase their investment levels.

What has been the RBI’s stance?

RBI, in its latest meeting, raised its annual inflation forecast for FY23 from 4.5% to 5.75% and cut gross domestic product growth rate for FY23 to 7.2%. It said it would prioritize inflation before growth and the stance would be less accommodative. There would be a calibrated withdrawal of liquidity in a non-disruptive manner. However, as the current inflation is primarily cost-push in character, the government should put in place effective fiscal policy measures.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.