Have Indians become Immune to Inflation?

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How many times in India have we witnessed opposition political parties creating hullabaloo over high inflation against the ruling party?

Take a recent example of the opposition stalling Parliament proceedings over high food inflation. Before that, the NDA and other political outfits had also called for a 12-hour ‘Bharat Bandh’ on July 5 on the burning issues of hike in fuel prices and untamed inflation.

Economic Growth and Inflation are said to be 2 sides of a same coin. Sustained growth triggered by rising aggregate demand can lead to acceleration in inflation as the economy consumes its scarce resources, leading to inelasticity in the near-term supply side dynamics.

Food Inflation

Unfortunately, in most cases the finance minister of the ruling party postulates the root cause of high prices as supply-side constraints, backed by the robust domestic demand fuelled by growth, to shield itself from the spiraling inflationary scenario and accelerated food prices.

Moreover, the inflationary trend is prevalent not only in food articles but across the board – be it in the form of education, healthcare, consumer durables or even transportation costs. The longevity and stubbornness of thriving inflation raises one very interesting question in the mind:

Have Indians become immune to Inflation?

In fact, speaking about Indians becoming more immune to Inflation, reminds me about our Media channels. The manner in which the Media people broadcast the inflationary issues on their NEWS channels, it gives a feeling that they are certainly adapt in making a mountain out of a molehill.

Prices of most pulses are high due to demand-supply mismatch and people are prompted to pay as high as up to Rs.100 a kg for selected variety of pulses. Consumers are hit badly as retail prices of most food commodities are ruling about 50% higher than the wholesale market. Thankfully, sugar prices have slumped more recently from its yearly highs.

It is said that Indians, now, have become more used to the price rises than ever before. Potato prices have already soared in the retail markets at Rs.20 per kg. Moreover, Pakistan has started importing potatoes and tomatoes from India after floods in the country destroyed the crops. This could lead to further hardening of prices in potatoes domestically.

Tomato prices are already quoting sky-high at Rs.40 per kg in India. Thus, even the most basic food items, used by rich and poor both, like potatoes and tomatoes are not spared from the hit of inflationary monster.

Higher CPI has co-existed with high consumer demand for almost two years now. For a country like India which is used to an average inflation of less than 5% from 1996 to 2006, the sustenance and tolerance of high double-digit inflation by the Indian public, for as long as last 2 years, comes as an unfamiliar development.

One reason of this increased tolerance level amongst the public could be rise in income levels. Post recession, there is a marked surge in attrition levels – signaling rebound in the salary and wages of employees of private firms. In fact, the Sixth Pay Commission has also played a significant role in providing boost to the overall wages of public sector employees.

On the national level, even government has increased its spending on various infrastructural and social sector spending programs such as Pradhan Mantri Gram Sadak Yojana and National Rural Employment Guarantee Scheme among various other state-owned initiatives.

Emergence of Rural BPO sector has also played its own role in ensuring incremental job opportunities going deeper and remote into the Indian villages and towns. More demand begets more jobs. And, more jobs can translate into higher income and spending ability.

Once higher rural spending by the Centre and job opportunities spurred by the higher economic growth start trickling into the economy, it leads to gradual spurt in demand for various high-end goods and services. Take, for instance, higher rural income could call for a higher demand for consumer durable goods such as LCD televisions, microwave ovens, refrigerators or even mobile handsets.

Thoughts Invited…

  1. Madhav Shivpuri says

    Altaf,

    I agree with you. I don’t think the inflation need to be as high as it is currently because of less monsoon or less cultivable land or shrinking agri-labour. Some of these may be addressed by speeding up of transportation of fresh vegetables, breaking up of the middlemen setup, making available of vegetables and grains at reasonable prices through Govt./ NPO run setups.

    Apart from the above, there is also the question of ‘quality’ of these vegetables and grains. In the developed world they are conscious about eating organic stuff, i.e., no pesticides, usage of clean water and controlling/ ensuring the good quality of food. In developing world this might seem like a luxury. In US, consumers pay less for the same quantity and get better quality. Is that we don’t think about it or demand it?

  2. Jagannath A says

    altaf views are quite right regarding the middleman issue.

    I will be very happy to pay good price for vegetables etc if it directly benefit the farmers. but that is not the case. ‘farmer’s market’ concept in tamilnadu was doing well but as for all other innovative things that keep abuse by middlemen away, they have confronted this also.

  3. Altaf Rahman says

    As I was saying the brokers who stand to loose, have once again started the same song once again.
    Theor intention is to hold common people to ransom. They dont want to loosen their clutches and their hold on supply chain management. They dont want transparency in costs involved in supply chain management.
    They say if retail is opend up, 4.5 crore brokers will loose earnings. Once again a phoney figure. Do you really think there are 4.5 kirana stores for 100 crore indians? There may be hardly a crore or so. But the one crore are spread across the nation. Even if big retailers enter fray, they will be located in cities, towns only. Also if their entry causes loss of livelyhood for “brokers” in cities and towns (which is a good development even if all brokers loose jobs which is unlikely) it also opens lakhs of new employment.

    Read teh complete news here !!
    http://www.business-standard.com/india/news/traders-to-launch-nationwide-protest-against-fdi-in-retail/105984/on

  4. Altaf Rahman says

    In general, what you have said is true regarding “inflation is due to supply-demand mismatch”.

    But it is equally true that the inflation in mostly in food grains, vegitables, vegitable oils and many of the items of daily use of common man are due to the middle men in the market. If the inflation is a striaght one, the farmer shouldl benifit (by the logic of supply demand mismatch). But whats actually happening is middlemen are squeezing both rural supplier and urban demand side by hording stocks.

    In light of this the idea of Malls comes into prominence. We need big, super big malls which in order to have goods filled all teh time in their shelves, will bypass middlemen and buy directly from farmers.

    The end result ??
    1) Farmers get better prices, better management technics to manage supply side efficiently.
    2) Common man will benifit in the shape of lower prices and fresh goods.

    But will the middlemen go down without a fight? No chance!! They take the help of some low life politicians and agitate (voilently) to stall entry of malls.

    They know that the moment retail is opened, they are finished. So they spread so many cock and bull stories about how biggies will first take the whole business from them and later with no compitition, increase prices.

    Unfortunately there are many indians who buy such illogical stories.

    I am not saying that big retailers will make inflation disappear but atleast we have transparency. The present inflation is based on what price the retailer sells goods. We do not have access to how the retailer arrived at selling price. He can buy at Rs.10 and can sell at 100. Govt only take sthe figure of 100 in calculating inflation. Nobody asks the retailer why 100?

    With big retail businesses in picture the compitition itself will make them play straight. We will have inflationary figures in black and white.

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