3 min read.Updated: 22 Nov 2019, 01:04 AM ISTHimanshu
Rising food inflation caused by structural bottlenecks could push even more Indians into poverty
It is clear from the divergence between the rise of wholesale prices and that of consumer prices that increased demand is not pushing up inflation
All indicators of economic activity now suggest that gross domestic product estimates for this fiscal year’s second quarter, expected at the end of November, will be lower than the 5% recorded in the first. It is now clear that the growth downtrend is continuing despite government efforts to address it. While the government has been battling declining demand, it may now have to grapple with another worrying problem: rising inflation.
Data released last week showed consumer price inflation at 4.6% for the country, with rural inflation at 4.3% and urban at 5.1%, all for October. This was largely driven by a rise in food inflation, which climbed to 7.9%, the highest since August 2014. Urban food inflation was in double digits, at 10.5%, the highest for the Bharatiya Janata Party government’s tenure since 2014, while rural inflation rose to 6.4%. While rising inflation may be a worrying sign for the Reserve Bank of India and the government—which is eyeing rate cuts as a way out of the economic slump—it may also signal a revival of demand.
Such an assumption, though, may be premature at this stage. It is true that food inflation has been rising faster than overall inflation. But the same data also shows core inflation declining to a low of 3.3%. Thus, the rise in overall inflation as well as food inflation is unlikely to be a result of rising demand driven by rising incomes. Some of this is confirmed by the wholesale inflation numbers: the Wholesale Price index (WPI) rose just 0.16% in October. This was the lowest rate since July 2016 and extended a downtrend that began in October last year.
The sharp decline in India’s wholesale inflation is in contrast to the trend in consumer inflation, which has been on the rise over the past six months. This divergence suggests inflation is largely being driven by supply-side structural issues. On the other hand, there is some similarity between WPI inflation and core inflation in the consumer price index, with both showing a decline over last year. The message from this softening price trend, particularly in the manufacturing sector, is that the demand situation has only weakened. Some evidence of this is also seen in the data on rural wages, declining since the beginning of this year.
The real problem lies in food inflation, which has been showing an uptrend both for consumer and wholesale prices. Wholesale food inflation has surged to 7%, turning around from deflation until December 2018. It is this sudden rise in food inflation that should worry the government. It has come at a time when there is no sign of economic recovery. Most likely then, it is driven by structural bottlenecks and supply issues in food, primarily in case of fruits, vegetables and meat items. A deeper analysis also shows that it is not seasonal items that are driving food inflation, but cereals—mainly wheat and coarse cereals. Wheat prices have been rising sharply since July last year, despite record production in the last two years. This is partly due to the government hoarding a large part of the produce that was procured in the run-up to the general election of 2019.
At a time when India’s economy is slowing and incomes are under stress, higher inflation does not just limit the ability of the government to revive the economy, it also hurts consumers, including the poor. The preliminary evidence from the leaked report of the consumer surveys of 2017-18 clearly shows a decline in consumption and rise in poverty since 2011-12. Low food inflation helped somewhat shield the poor. But at the same time, the data also shows that absolute expenditure on food declined in real terms during the six-year period. Worryingly, though, after 2017-18, not only have incomes fallen faster, the rise in food inflation may also have pushed more people into poverty. Given that food still constitutes almost two-thirds of the consumption basket of the poor, rising inflation together with falling incomes places a double burden on them.
The challenge for the government is not only to revive growth in the economy, but also to manage inflation so as to protect the poorest of the poor. Fortunately, both these objectives can be achieved through a single solution, which is to raise wages for the poor. This would not only help create demand to stimulate growth, but would also lead to an increase in consumption by the poor. As many have pointed out, there are several ways for the government to achieve these objectives, provided it recognizes the gravity of the current situation. And of course, if it has the political will to do so.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi