Our three-front battle on inflation, unemployment and inequality
Ajit Ranade
The labour force participation rate in India has fallen for three consecutive months, and was barely 40% in April. This is the lowest it has been since a lockdown was imposed last year. And the unemployment rate has gone up to 8%. Both these bits of data are from the Centre for Monitoring Indian Economy (CMIE), which tracks the labour market closely, based on a fairly large nationwide sample.
A complement to CMIE’s data is a recent report on labour and the economy during the covid pandemic called State of Working India 2021. The report is based on a year-long study done by researchers at Azim Premji University. Their findings pertain to the period up to October. It says that 230 million individuals have fallen below the threshold of a daily income of ₹375, which is India’s minimum wage. The authors conclude that the poverty ratio went up by 15% in rural areas and 20% in urban areas during March to October 2020. This means that Indian households in the bottom decile have lost the equivalent of two months of their income.
In the wake of our nasty second wave and attendant lockdowns, it is unlikely that the poverty ratio will improve anytime soon. While poverty is mounting, so is inequality. The stock market is bestowing increasing wealth and capital gains on those at the other end of the income pyramid. That is more due to a liquidity-driven rally, in sync with global stock markets, amid the anticipation of global fiscal stimuli. In India, however, both consumption and investment growth are muted. Growth in the index of industrial production over a two-year span has been negative, which means that the economy is yet to recover to its pre-pandemic levels.
Adding to these woes is inflation. Wholesale price index (WPI)-based inflation for April is now above 10%. Of this, the fuel sub-component was at 20%. This will manifest itself in petrol and diesel prices at retail pumps. As such, petrol prices are close to ₹100 per litre already, and diesel won’t be far behind. Inflation in manufactured products is at 9%.
Much of the WPI-based inflation reflects a strong uptrend in prices of commodities such as steel, iron ore, cement, chemicals and non-ferrous metals. Globally, steel at $1,000 per tonne has crossed the once ‘insurmountable’ peak price of 2008. The Bloomberg commodity spot index has hit its highest level since 2011.
This rally is partly due to vaccine optimism and strong growth prospects in the two biggest economies of the world—the US and China. The latter grew at 18% in the first quarter of 2021 and is expected to maintain that momentum. The US has an ambitious fiscal spending plan to rebuild its infrastructure. In anticipation, its economy is heating up, with its latest inflation clocking in at 4.2%. World trade is also picking up, as evidenced by a shortage of containers and soaring freight rates, both for bulk dry cargo and container shipments.
Rising prices have affected the agricultural basket too. The Food and Agricultural Organization’s food price index has risen by 31% in one year. Sugar prices have risen 58% and vegetable oils nearly doubled.
How much of India’s WPI inflation, which reflects rising input costs for producers, will be passed on to consumers remains to be seen. It is sure to exert upward pressure, especially in light of the increase in fuel costs. Of course, the CPI has a large weight of food items, and a good monsoon, which is quite likely, could result in a bumper crop, possibly arresting food inflation.
That might bring some cheer to the urban consumer, but it spells disaster for the farmer and rural producer. The prices of seasonal produce like fruits and vegetables might crash, crushing already- impoverished households. This phenomenon was highlighted this week as tomato farmers in Haryana chose to destroy their bumper crop rather than sell at very low prices. They said that they could not even recover their input costs, which were rising. The minimum support price mechanism, or any other proxy for price insurance. is simply unable to offer farmers relief, beyond those of cereals like wheat and rice.
Thus, as we battle a second covid wave and related lockdowns, we also face the prospect of higher inflation, unemployment and inequality, and lower incomes for most households, especially in rural areas. The informal sector, consisting of small and medium enterprises, is still struggling. The Reserve Bank of India extended special credit and liquidity measures for them recently. We may also need a second round of India’s loan-repayment moratorium and restructuring of overdue loans.
The only other way to tackle this double whammy of inflation and loss of incomes is through direct fiscal support to hard-hit households. As the Working India report suggests, cash injections of ₹5,000 per month to all those covered by the public distribution system (PDS) would be advisable for at least three months. Note that the PDS’s coverage is twice as large as that of no-frill Jan Dhan bank accounts. An extension of higher grain provisions for food security, as carried out last year, is also necessary.
We shouldn’t let India’s income and livelihood crisis also become a food crisis. Of course, the immediate priority is to attend to our health crisis, for which we need universal and free vaccination as quickly as possible. The fiscal resources needed for all this are to be raised from present and future generations. And raise these funds, we must.
Ajit Ranade is chief economist at Aditya Birla Group.
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Ajit Ranade
The labour force participation rate in India has fallen for three consecutive months, and was barely 40% in April. This is the lowest it has been since a lockdown was imposed last year. And the unemployment rate has gone up to 8%. Both these bits of data are from the Centre for Monitoring Indian Economy (CMIE), which tracks the labour market closely, based on a fairly large nationwide sample.
A complement to CMIE’s data is a recent report on labour and the economy during the covid pandemic called State of Working India 2021. The report is based on a year-long study done by researchers at Azim Premji University. Their findings pertain to the period up to October. It says that 230 million individuals have fallen below the threshold of a daily income of ₹375, which is India’s minimum wage. The authors conclude that the poverty ratio went up by 15% in rural areas and 20% in urban areas during March to October 2020. This means that Indian households in the bottom decile have lost the equivalent of two months of their income.
In the wake of our nasty second wave and attendant lockdowns, it is unlikely that the poverty ratio will improve anytime soon. While poverty is mounting, so is inequality. The stock market is bestowing increasing wealth and capital gains on those at the other end of the income pyramid. That is more due to a liquidity-driven rally, in sync with global stock markets, amid the anticipation of global fiscal stimuli. In India, however, both consumption and investment growth are muted. Growth in the index of industrial production over a two-year span has been negative, which means that the economy is yet to recover to its pre-pandemic levels.
Adding to these woes is inflation. Wholesale price index (WPI)-based inflation for April is now above 10%. Of this, the fuel sub-component was at 20%. This will manifest itself in petrol and diesel prices at retail pumps. As such, petrol prices are close to ₹100 per litre already, and diesel won’t be far behind. Inflation in manufactured products is at 9%.
Much of the WPI-based inflation reflects a strong uptrend in prices of commodities such as steel, iron ore, cement, chemicals and non-ferrous metals. Globally, steel at $1,000 per tonne has crossed the once ‘insurmountable’ peak price of 2008. The Bloomberg commodity spot index has hit its highest level since 2011.
This rally is partly due to vaccine optimism and strong growth prospects in the two biggest economies of the world—the US and China. The latter grew at 18% in the first quarter of 2021 and is expected to maintain that momentum. The US has an ambitious fiscal spending plan to rebuild its infrastructure. In anticipation, its economy is heating up, with its latest inflation clocking in at 4.2%. World trade is also picking up, as evidenced by a shortage of containers and soaring freight rates, both for bulk dry cargo and container shipments.
Rising prices have affected the agricultural basket too. The Food and Agricultural Organization’s food price index has risen by 31% in one year. Sugar prices have risen 58% and vegetable oils nearly doubled.
How much of India’s WPI inflation, which reflects rising input costs for producers, will be passed on to consumers remains to be seen. It is sure to exert upward pressure, especially in light of the increase in fuel costs. Of course, the CPI has a large weight of food items, and a good monsoon, which is quite likely, could result in a bumper crop, possibly arresting food inflation.
That might bring some cheer to the urban consumer, but it spells disaster for the farmer and rural producer. The prices of seasonal produce like fruits and vegetables might crash, crushing already- impoverished households. This phenomenon was highlighted this week as tomato farmers in Haryana chose to destroy their bumper crop rather than sell at very low prices. They said that they could not even recover their input costs, which were rising. The minimum support price mechanism, or any other proxy for price insurance. is simply unable to offer farmers relief, beyond those of cereals like wheat and rice.
Thus, as we battle a second covid wave and related lockdowns, we also face the prospect of higher inflation, unemployment and inequality, and lower incomes for most households, especially in rural areas. The informal sector, consisting of small and medium enterprises, is still struggling. The Reserve Bank of India extended special credit and liquidity measures for them recently. We may also need a second round of India’s loan-repayment moratorium and restructuring of overdue loans.
The only other way to tackle this double whammy of inflation and loss of incomes is through direct fiscal support to hard-hit households. As the Working India report suggests, cash injections of ₹5,000 per month to all those covered by the public distribution system (PDS) would be advisable for at least three months. Note that the PDS’s coverage is twice as large as that of no-frill Jan Dhan bank accounts. An extension of higher grain provisions for food security, as carried out last year, is also necessary.
We shouldn’t let India’s income and livelihood crisis also become a food crisis. Of course, the immediate priority is to attend to our health crisis, for which we need universal and free vaccination as quickly as possible. The fiscal resources needed for all this are to be raised from present and future generations. And raise these funds, we must.
Ajit Ranade is chief economist at Aditya Birla Group.
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