Indian Economy, 5th edition (28 page)

Decadal inflation
in India looks comparatively normal with reference to many developing economies.
45
But it has sporadic incidences of double-digit tendencies mainly due to supply-side shortfalls caused by droughts (monsoon failures), price rise of crude oil in the international market or fund diversions due to wars (the Chinese war of 1962 and the Pakistan wars of 1965–66 and 1971). The decadal inflation in India has been as given below:
46

(i)
During 1950s:
remained at 1.7 per cent.

(ii)
During 1960s:
remained at 6.4 per cent.

(iii)
During 1970s:
remained at 9.0 per cent.

(iv)
During 1980s:
remained at 8.0 per cent.

(v)
During 1990s:
remained at 9.5 per cent (though it reached 0.5 per cent by the fourth quarter of the fiscal 1998–99)

(vi)
During 2000–01 to 2012–13:
remained at 4.7 per cent (upto August 2007) with the fiscal 2002–03 at 3.4 per cent (the lowest) and the fiscal 2004–05 at 6.5 per cent (the highest).But the years after 2008 has been tough on the front of inflation. Headline year-on-year WPI inflation after remaining persistently high in 2010, 2011 and 2012. Though it did show signs of moderation by late 2012, financial year 2012-13 started with an inflation of 7.5 per cent increasing to 8.07 per cent by
December 2012
. Some of the contributory factors
47
for the higher inflation during the period were:

(a)
Higher primary articles prices driven by vegetables, eggs, meat, and fish due to changing dietary pattern of consumers;

(b)
Increasing global commodity prices especially metal and chemicals;

(c)
High international prices of crude oil.

Economic Survey 2012-13
projects a moderate rate of inflation of 6-6.5 per cent during the fiscal 2013-14 with expected short-term shocks due to – inadequate food stocks, slippages in the targets of the fiscal consolidation, checking real estate bubbles, and energy prices.

The last time inflation went in double digits it was in the fiscal 1991–92 when it was at 13.6 per cent by 1997–98, though it moderated to the level of 3.5 per cent later.
48

An analysis of inflationary trends in India does not pin-point any one reason behind it. The economists have pointed out all possible reasons (the so-called
‘good’
and
‘bad’
) behind the inflationary pressures in the economy of which we may have a brief review:

1. Structural Inflation

With few exceptional years, India has been facing the typical problem of bottleneck inflation (
i.e structural inflation
) which arises out of shortfalls in the supply of goods, a general crisis of a developing economy, rising demand but lack of investible capital to produce the required level of goods.
49
Whenever the Government managed to go for higher growths by managing higher investible capital it had inflationary pressures on the economy (seen during 1970s and 1980s, specially) and growth was sacrificed at the altar of lower inflation (which was politically more justified)
50
. Thus the supply-side mismatch remained a long-drawn problem in India for higher inflation. After some time even if the government managed higher expenditure, most of it was eaten by the non-developmental areas which did show low growth with higher inflation signs of a stagnating economy.

2. Cost-Push Inflation

Due to ‘inflation tax’ the price of goods and services in India have been rising as the Government took alternative recourse to increase its revenue receipts.
51
We see it taking place due to higher
import duties
on the raw materials also.
52
The
non-value-added
(non-VAT) tax structure of India in the past was also having cascading effect on the prices of commodities in the country.
53
The Government needed higher revenues to finance its planned development thus the above given factors looked inescapable!

3. Fiscal Policy

To finance the developmental requirements of the economy, the Governments became trapped in the cyclical process of over-money supply. At first it was done by external borrowings but by the late 1960s onwards (once
deficit financing
got acceptance around the world) the governments started taking recourse to heavy internal borrowings as well as printing of fresh currency too. A major part of the government’s internal borrowing is contributed by the Reserve Bank of India (RBI) which leads to price rise.
54
For any government deficit if the Central Bank (RBI) is purchasing primary issues of the Government securities or creating fresh advances to the government the combined effect has to be higher inflation, lower savings rates and lower economic growth
55a
—the vices of unsound fiscal policy. The higher fiscal deficit tends to bring about higher interest rates as demand for funds rise, excess demand raises expected inflation and expected depreciation of the currency
55b
. Once the foreign exchange (Forex) reserves started increasing with a faster pace by the early 2000–01 fiscal, its cost of maintenance has been translated into higher prices, as the RBI purchases the foreign currencies it supplies into equivalent rupees into the economy which creates extra demand and the prices go up.
56

The higher revenue deficits (driven by high interest payments, subsidies, salaries and pensions, basically) and fiscal deficits make the government supply more money which push the inflation in the upward direction. Once the Fiscal and Budget Management Act came into force in 2003, the scenario improved in the coming times. Though the period from 1999 to 2003 did show high growth with low inflation and the lowest interest rates in India.

Protein Inflation

Some recent articles suggest that a change in dietary habits towards protein-rich foods has been a key driver of high food price inflation in India
(Subbarao 2011, Gokarn, 2011);
they also suggest that this is a result of:

(a)
rising nominal rural wages helped by the expansion of the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) scheme;

(b)
inadequate producer supply responses relative to demand; and

(c)
shocks from global food inflation, as India integrates with the world. A more nuanced view is possible on each factor.

Protein inflation:
rising prices of pulses, fish, meats, eggs, and milk is evident (figure above). But the causes are more complicated than rising spending among low-income rural households. First, the shift to more expensive proteins is very unlikely to be from rising incomes in rural areas from income groups benefited by the MGNREGA. Incomes of average rural households in the bottom two deciles (MGNREGA target beneficiaries), for example, would have to jump to those of the rich farmer category, the sixth decile in rural areas, for a modest Rs. 100 monthly increase in per capita spending on protein-rich items by those households. The average (5th decile) urban household, by contrast, spends as much as seven times more than the bottom rural decile on protein-rich foods, and could achieve the same increase with a much more modest increase in incomes. Fast-growing urban consumers benefiting, for example, from the government’s sixth pay commission pay hikes in 2008-9 and even larger private-sector salary hikes after a spectacular urban growth spurt during 2004-8, are a far more likely source of rising demand. Consider milk consumption. Monthly per capita liquid milk consumption in urban areas (from National Sample Survey [NSS] data) is far higher (5.4 litres) than in rural areas (4 litres); milk products (powder, solids, paneer, cheese, others) consumption is overwhelming and fastest growing (over 12 per cent per annum) in urban areas worldwide. Whereas, much of rural consumption is in own use, non-market forms that only affect market prices from a distance.

Second, we turn our attention to supply-demand imbalances. Milk happens to have the biggest weight (52 per cent) in consumption expenditures on protein-rich items in India and a closer look is useful. It turns out that inability to produce Milk is not necessarily the problem. India is the world’s largest milk producer, milk production has been growing by over 4 per cent per annum, twice as fast as general agriculture and world production, and as rapidly as rising demand, raising per capita consumption successfully from 217 g to 263 g per day during 2000-10. Exports of milk products are also growing. Thanks to the ‘white’ revolution, the sector is relatively better organised, a success story worldwide, by helping smallholders into cooperatives and arranging an efficient collection, storage, and distribution system. Less well-developed but similar systems also operate in egg, poultry, and fisheries, whose production has also grown apace. Despite weaker and more volatile production, pulses, the poor-man’s protein, have seen a lower price rise.

Two things stand out regarding Indian milk prices.

1.
Global milk prices have surged, helping Indian milk prices rise higher; the decline of the EU’s milk surplus has been a key factor, as important as rising appetites among richer urban classes in emerging markets;

2.
Indian milk prices have, however, grown even faster, doubling from US$200 a tonne in 2002 to well over US$400, catching up with the USA, the world’s richest milk producer, and matching New Zealand. Notice also the smoother price rise in India, which is characteristic of more ‘organised’ market processes. Such higher prices are expected to lead to rapid reduction response, although rising feed costs (fodder) for smallholders are a major factor in a land-scarce country.

[
Sources : (1)
FAO Food Stats and Country Data;
(2)
Duvvuri Subbarao, 2011. The Challenge of Food Inflation, Presidential Address, Annual Conference of the Indian Society of Agricultural Marketing, Hyderabad, 22 November.
(3)
Subir Gokarn, 2011. Kale Memorial Lecture, Gokhale Institute of Politics and Economics, Pune, 9 December.
(4)
Dipak Dasgupta et al., 2011. Domestic Wheat Price Formation and Food Price Inflation in India, Ministry of Finance Working Paper.
(5)
Nancy Morgan, 2009. Dairy Prices, Policies and Potential Opportunities for Smallholders in Asia, Asia-Pacific Dairy Strategy project.
(6)
Wayne Arnold, 2007. A Thirst for Milk Bred by New Wealth Sends Prices Soaring, New York Times, September 4.
(7)
Jesper Stage, Jorn Stage, and Gordon McGranahan, 2009. Is Urbanization Contributing to Higher Food Prices? UNFPA.
(8)
Milk Prices up 35%, CCI targets ‘cartel’. The Financial Express, 2011.
(9)
Shalini Gupta, Food Expenditure and Intake in the NSS 66th Round, Economic and Political Weekly, 14 January, 2012, Vol. XLVII, No. 2.]