Home >Opinion >Columns >Opinion | It may not be too late for efforts that can rescue growth in India
Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Opinion | It may not be too late for efforts that can rescue growth in India

The best way to revive the Indian economy lies in helping the poor increase their real incomes

Data released on 12 February on and consumer price inflation suggest that India’s economy is far from a recovery in the near future, contrasting claims made by the finance minister earlier this week. Retail inflation quickened to 7.6% in January 2020, from 7.35% in December 2019.

Far more worrying is the trend in food inflation, which continues to be in double digits for the third month in succession, with consumer food inflation at 13.63% in January. While usual suspects such as vegetables, which suffer from seasonal supply shocks, continue to show high inflation at 50%, inflation is now rising for most other food crops as well. Particularly worrying is the high food-grain inflation, at 7.3% in January 2020, having steadily climbed from under 1% at the end of 2018-19. It has also spread to other food items such as milk (5.6%), eggs (10.4%) and meat products (10.5%), most of which are not seasonal, but have been pushed up by rising feed prices.


The trend also indicates that food inflation is unlikely to fall in the coming months. Rising feed prices pushing up prices of non-vegetarian items are a spill-over from cereal prices. But why are these rising despite record production? Part of the reason is an artificial supply shock created by the government, which has mopped up almost one-third of all production for its stocks. Foodgrain stocks in the central pool alone stood at 75 million tonnes on 1 February 2020, and have been the same for the last three months. With India restricting palm oil imports, edible oil prices have also started rising and will rise further. Food price inflation is likely to remain elevated along with overall inflation.

Rising inflation, particularly food inflation, at a time when the economy is suffering from low demand, would be an indication of a demand recovery. However, such a conclusion at this time seems premature. The role of the government in pushing inflation through an artificial scarcity in the foodgrain market and unnecessary import restrictions is a clear pointer that rising inflation is unlikely to be a result of rising demand. However, direct data on incomes does confirm that, if anything, the economic conditions of most wage workers have worsened.

Data on wages from the Labour Bureau is now available until November 2019. Real wages of general agricultural labourers have declined by 1.8% from November 2018, while those of non-agricultural labourers have fallen by 2.1%. Compared to November 2016, the month of demonetization, real wages of all agricultural occupations have declined by 0.3% over the last three years, while those of non-agricultural unskilled workers have declined by 0.14%. Clearly, while prices are rising faster, there is no evidence of worker incomes rising alongside.

While direct income data refutes any evidence of rising demand, even the data on industrial activity from the index of industrial production (IIP) for December 2019 shows a contraction in economic activity by 0.3% compared to the previous year. In fact, the cumulative growth in industrial activity for the April-December period shows only a marginal rise of 0.5%. Even other leading indicators such as automobile sales, credit growth and so on suggest no recovery.

While there is no evidence of economic recovery, with income data pointing to a worsening of the economic situation, rising inflation is likely to make the process of achieving a turnaround difficult and painful. The poor are likely to cut back on essential non-food expenditure as household budgets are squeezed due to rising food prices, leading to a further decline in demand. But it will also lead to declining food consumption, which the poor cannot afford given their high levels of malnutrition. The best way of reviving the economy lies in helping the poor increase their real income.

At a time when the economy needed the government to spend money on social security schemes and rural infrastructure, the trend in expenditure suggests a government working against it. Budget estimates indicate reduced expenditure on several of the schemes that could have helped the poor raise their incomes. While the government was generous in compensating the corporate sector for the loss of economic momentum, it is the poor and middle classes which pay for the generosity of the government through reduced expenditures and subsidies. If the government is serious about effecting an economic recovery, it is time it realized that sabka saath is the only way of achieving sabka vikas.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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