Inflation is a tax on the poor as it results in an indirect transfer of resources from the poor to the rich. Inflation shrinks the real incomes

Inflation Paradox

By Paranjoy Guha Thakurta

The single biggest failure of the second UPA government on the economic front has been its inability to control food prices.

At least three kinds of pulses (tur, arhar and moong dal) cost a record Rs 100 a kilogram (kg). Sugar prices have jumped nearly threefold over the past fifteen months. Butter went missing from shops in many parts of the National Capital Region (NCR) over the first fortnight of November in anticipation of a price hike. Potato prices have doubled over the last year. Non-seasonal fruits and vegetables have become a luxury not just for the aam admi in whose name the Congress-led coalition government won an electoral victory in April-May but even for large sections of the country’s middle class.

Inflation has returned to haunt India. Soaring prices of vegetables like potatoes and onions had pushed the annual rate of inflation for food articles to 19.05 per cent for the week ended November 28. Food inflation was 17.47 per cent for the previous week ended November 21. Official data released on December 10, 2009, indicated that over a year, prices of like cereals had gone up by 12.7 per cent (rice by 11.75 per cent, wheat 12.6 per cent and all categories of pulses by 42 per cent), fruits were expensive by 13 per cent while milk became costly by 11.36 per cent.

Yet, for the month of October, the overall rate of inflation as measured by the wholesale price index (WPI) stood at only 1.34 per cent against 11.06 per cent in the corresponding month a year ago. In the period between June and August, the WPI had remained in negative territory for 13 weeks. The apparent paradox is explained by the nature of the WPI which is an economy-wide index covering as many as 435 commodities. The true picture emerges only when one looks at the disaggregated figures. Within the WPI, prices of all primary food articles jumped by almost 20 per cent while prices of all vegetables shot up by a huge 50 per cent.

Many argue that the relatively slow growth of farm productivity (which is on account of many years of neglect of public investments in agriculture) is an important reason for the current spurt in food inflation. Another factor is the haphazard way in which the country has exported and imported food products over the recent past.

A few examples would suffice: in the course of calendar 2006, exports of onions surged by over 60 per cent while retail prices at home shot up by around 150 per cent. In the first half of 2009, 4.8 million tonnes of sugar were exported at Rs 12 a kg but the country will now be importing 7 million tonnes at a landed price that is more than double the price at which sugar was exported.

The government’s recent track record in managing food supplies, calibrating exports and imports and coordinating the activities of three ministries (Agriculture, Commerce and Finance) has not been particularly creditable.

Add corruption to the scenario. The outcome of the official inquiry into the rice export scam is awaited. During 2008, at a time when there was a ban on its exports, consignments of non-basmati rice from Indian found their way to a clutch of African countries — ostensibly as “humanitarian aid” — through a selected group of exporting firms. Curiously, some of these consignments were diverted through Europe.

Inflation is a tax on the poor as it results in an indirect transfer of resources from the poor to the rich. Inflation shrinks the real incomes of the underprivileged faster than the incomes of the affluent. When inflation is driven by high food prices, it becomes a double tax on the poor because the poor spend a relatively much higher proportion of their total incomes on food unlike the rich. Unfortunately for the majority of people in the country, food prices are expected to continue to rise in the coming months.

(The writer is an educator and a journalist with 30 years’ experience)