The poor are bearing the brunt of inflation

Krishna Raj
Professor, Institute for Social and Economic Change, Bengaluru

India’s inflation and temperature levels are soaring high, affecting the poor and middle class the most. In contrast, the rich continue to be unaffected as they shelter under air-conditioners and affluence. India’s retail inflation estimated in applying the Consumer Price Index (CPI) has unprecedentedly increased to 7.79% in April since 2014, according to sources in the Ministry of Statistics and Programme Implementation, Government of India, whereas India’s average mean and maximum levels of temperature in April have increased to 31.35°C and 35.30°C, respectively, as per records of the India Meteorological Department. The onslaught of both on the poor is terrible, making them more vulnerable. But nature may show mercy on the poor in easing the temperature during the coming southwest monsoon, but the high inflation or general price rise has become the new normal for 50-crore poor people of India for the past few years.

As per the OPHI (Oxford Poverty and Human Development Initiative) and UNDP Global Multidimensional Poverty Index 2021, about 22.5 per cent of the Indians are extremely poor and they struggle for survival with less than $2 per day. Further, multi-dimensional poverty in terms of health, education and standard of living is much lower than the income poverty. In recent times, more Indians have been pushed into the absolute poverty trap due to the onslaught of Covid-19, joblessness and high inflation. Both the retail and wholesale inflation measured in Consumer Price Index (CPI) and Wholesale Price Index (WPI) are on the rise consecutively for the past several months. The CPI inflation is steadily increasing from 6.01% in January, 6.07% in February, 6.95% in March and 7.79% in April 2022. The WPI inflation is also constantly on the rise from 13.68% in January to 14.55% in March as per sources in the Ministry of Commerce and Industry. Even though the Russia-Ukraine war has exacerbated global inflation in recent times, inflation in India existed much before the war due to rising fuel and food prices and the government’s price stabilisation policy has yielded no result. India’s rural poor have borne the burden of price rise as consumer food prices in rural areas have increased from 3.94% in March 2021 to 7.66% in 2022. Among the food basket of CPI, the price rise in oils and fats is about 24.3% while fuel, light, transportation and communication are 11%. Even though the crude oil prices in international market have increased to $110 per barrel, the Central and State taxes on fuel constitute 55% and 50% on petrol and diesel, respectively, and are still high in domestic markets. The high food and fuel inflation rates are mainly responsible for pushing the cost of input and output prices which resulted in an increase in wholesale inflation.

Core inflation which excludes seasonal variation in food and energy costs has crossed the official limits and the monetary policies may fail to yield quick result under this condition. Further, monetary policy alone does not guarantee the arrest of retail inflation unless the government takes the burden by reducing the general prices by reducing the tax on fuel and easing the food prices by imports. In fact, monetary policy may succeed in bringing down wholesale inflation when compared to retail inflation but at the cost of economic activities. The hike in repo rate by the Reserve Bank of India, from 4% to 4.4% basis points, reduces economic activities with an increase in bank interest rates for borrowers rather than bringing down the retail prices. The increase in repo rate will slow down India’s economic growth.

World Bank president David Malpass in his address on ‘Challenges to growth, security and stability’ observed that “inflation continues to accelerate, reducing the real incomes of households around the world, especially the poor. For every one percentage point increase in food prices, 10 million people are expected to fall into extreme poverty. The rich can suddenly afford expensive staples, but the poor cannot. Malnutrition is expected to grow and its effects will be the hardest to reverse in children.”

India’s 50-crore poor comprising socially and economically weaker sections in rural areas and urban slums are pushed to acute poverty under the effect of inflation. The declining wage rates, Covid-19, high rural unemployment, income inequality and high food inflation have far-reaching implications for India’s trajectory towards alleviating poverty. The poor are still recovering from the disastrous effects of Covid-19, whereas inflation has a diabolic impact on the poor. The cost of living has become burdensome as the average prices of petrol and diesel per litre doubled from Rs 66 and Rs 53, respectively, in 2015 to Rs 110 and 96 in May 2022, whereas the retail price of LPG domestic cooking gas has gone up from Rs 600 to Rs 1,000 for the same period. The average edible oil prices have spiked from Rs 125 to Rs 200. On an average, the prices of pulses, vegetables, edible oil, fruits, milk, egg, fish, meat and other commodities have increased by 50 per cent. However, the average daily wage rates for general agricultural labourers in rural India has increased from Rs 224 in 2015 to 286 in 2020 as per the report of the Reserve Bank of India.

The prices of essential food items have increased by 50% in seven years (2015 to 2022), whereas the real wage rate has risen by 22 per cent. These figures show that inflation has dented the real income of the poor, making their lives miserable as the food basket constitutes a substantial proportion of the total expenditure on the poor. The net effect is that the poor earn less and borrow loans to maintain the minimum standard of living. As per the NSSO report, the consumption expenditure on food in rural India has come down drastically in recent years. Further, inflation continues to affect the health and nutrition of the children, women and the poor as the calorie intake will drastically get reduced. Therefore, proactive government intervention is needed to check food and fuel inflation, increase employment in rural areas, reduce income inequality, strengthen the public distribution of essential commodities among the poor and enhance the average daily wage rate in rural India. These policy measures will significantly minimise the cost of living and reduce the impact of inflation on the poor.