Causes of Inflation in India and its Remedy

 

How and Why of high and persistent inflation in India

Inflation in India moves up

Inflation in India has remained high and persistent in the last six years. As the Indian economy grew at an unprecedented rate of almost 8.5 per cent during the period, rising incomes propped the purchasing power of the population, driving consumption demand. The surge in demand triggered inflationary pressures, particularly in sectors where supply lagged behind. Gradually, inflation became generalised, as public policy continued to spur growth in  consumption demand and wages.

Inflation is the increase in the average prices of a basket of goods and services, measured by an index. There are three measures of inflation in India: WPI, CPI, and the gross domestic product (GDP) deflator. The third measure is the most comprehensive, as it takes into account all goods and services produced in the economy. All three measures reveal signs of an early pick-up in inflation in 2006-07 and persistence thereafter. WPI inflation consistently surpassed the RBI's comfort threshold of 5 per cent in 51 of the 70 months between April 2006 and January 2012. It averaged 6.6 per cent over 2006-07 to 2010-11, rising from 4.7 per cent during the previous five years. CPI inflation, over the same reference period, rose to 9.0 per cent from 4.1 per cent, and inflation measured by the GDP deflator climbed to 7.4 per cent from 3.9 per cent. During April 2011- January 2012, CPI and WPI inflation averaged 8.8 per cent and 9.1 per cent; inflation measured by the GDP deflator averaged 8.2 per cent in 2011-12. Regardless of how you measure it, inflation in India has become high and persistent.

The past six years, since 2006-07 were punctuated with a series of adverse supply shocks. The shocks arose from a shortfall in food-grain and non-food grain commodities (vegetables, fruits, protein-based foods - pulses, milk, eggs, meat and fish). Sharp increases in international prices of fuels and commodity too were a trigger. Persistence in inflation, however, did not arise from supply shocks. Although supply shocks can trigger sudden and sharp inflationary pressures, the pressures diminish when supplies revive. Persistence in inflation stemmed, instead, from government policies that stimulated consumption demand by increasing wages and salaries but did not do enough to remove supply-side bottlenecks. Under fiscal policies that boosted consumption, the supply shocks had a more lasting effect, reinforcing inflationary pressures.

  Inflation was generalised; all the categories of the WPI contributed to inflationary pressures. Food inflation, however, was the most stubborn. It averaged 10.2 per cent over 2006-07 to 2010-11, and prevailed at over 15 per cent in the last two years of the period. Manufacturing inflation averaged 5.3 per cent, whereas fuel inflation averaged 10.2 per cent over the five-year period. Although food inflation has declined significantly since December 2011, it is likely to bounce back once the impact of seasonal factors and the effect of high base wear off. 
    Fiscal policy is the means by which a government adjusts spending and taxation to influence demand and the economy's capacity to produce goods and services. In India, an expansionary fiscal policy (through cuts in taxes, increase in government expenditure) has boosted consumption demand in recent years.

Consumption expenditure of the government increased by` 5,300 billion between 2004-05 and 2010-11, in comparison to an increase of ` 1,800 billion in expenditure on capital formation (Figure 1). Of the total direct government consumption expenditure, wages and salaries accounted for almost 50 per cent. Since 2008-09, the government expenditure focused more on boosting consumption demand in the short term.

CRISIL Insight

The rapid growth in consumption expenditure drove up total government expenditure, increasing the fiscal deficit. Fiscal-deficit-to-GDP ratio averaged 5.8 per cent in the post-crisis period (2008-09 to 2010-11), compared to the initial target of 3.0 per cent set by the Fiscal Responsibility and Budgetary Management Act (FRBM). In 2011-12 we expect the fiscal deficit to slip to 5.5 per cent of GDP vis-à-vis a budget target of 4.6 per cent (Figure 2). The higher fiscal deficit – and inadequate focus on expanding productive capacity – laid the breeding ground for inflation.

Government policies fuel wage rise across income categories

The sharp increase in wages which was near simultaneous across income groups in urban and rural India since 2004-05 (Box 1) boosted consumption demand. Urban and rural wages rose by 12.0-14.0 per cent over 2004-05 to 2009-10, compared to an increase of 7.0 per cent in the previous five-year period. Increases in income were especially sharp after 2007-08 (Figure 3). After the implementation of MGNREGS, rural wage growth gained momentum. Since 2007-08, rural wages rose faster than the inflation rate, as indicated by the sharp rise in real wages (Figure 4).

The rise in urban wages was an outcome of three factors: first, the supply of skilled labour did not increase in line with demand; second, the implementation of the 6th Pay Commission recommendations increased public sector wages; and lastly, rising demand for corporate- and house hold support services drove up wages of urban casual workers almost twofold.

 Such sharp wage increases, which more than compensated for inflation, had no explicit link to productivity improvement. Wage growth without productivity improvements is a recipe for inflation. The wages of a large section of workers in the economy rise in line with inflation. Wages in the public sector are linked to inflation. In February 2011, the government also linked wages under the MGNREGS to inflation. As MGNREGS - wages have become the benchmark floor for rural wages, wages of other rural workers too increase along with inflation.

The linkage between wages and inflation through MGNREGS will spread a wage-price spiral across sections of the economy. As the wage-price spiral threatens to fuel growth in consumption demand across the economy, it is critical to link wage increases to productivity, to augment supply in line with rising demand.

Key messages

Immediate steps to reduce and stabilise inflation at low levels

n Fiscal consolidation with a focus on increasing investment spending

- Develop a credible roadmap to reduce the fiscal deficit to GDP ratio

- Reorient government spending from consumption to investment to remove supply-side bottlenecks

n Productivity improvements in bottleneck areas

- Implement policies to improve farm productivity

- Step up efforts at skill development in sectors that face acute skill shortages

- Devise mechanisms to link wages to productivity in the public sector and in government safety-net programs such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

n Reduce shocks from sudden changes in administered prices of petroleum fuels, by aligning them to global prices.

How and why of high and persistent inflation

n The Indian economy appears caught in a high-inflation trap. Per-year WPI (wholesale price index) and CPI (consumer price index) inflation rose to 6.9 per cent and 9.0 per cent over April 2006 to January 2012, from 4.7 per cent and 4.1 per cent in the preceding five years. No matter how you measure it, inflation has been high over the past six years.

n Adverse stocks from shortfall of food articles, and higher global fuel and commodity prices triggered inflationary pressures. Persistence in inflation, however, originated from government policies that stimulated consumption demand but did not do enough to raise the supply potential of the economy.

n MGNREGS, sharply increased wages for rural workers from 2007. These wage increases, which were not linked to productivity improvements, added to inflationary pressure. This coincided with wage increases in the public sector and in the private sector (arising from skill shortages) which generalised inflation.

n Inflation inched further up in 2010-11; despite monetary tightening, inflationary pressures continued in 2011-12. A series of interest rate increases by the Reserve Bank of India (RBI) attempted to curb demand, which the higher fiscal deficit fired by consumption-oriented spending continued to spur. The nature and quantum of fiscal spending thus muted the effectiveness of the monetary policy.

Bihar the changing Times

Bihar is the 12th largest state in terms of geographical size at 38,202 sq miles (98,940 sq.km) and 3rd largest by population in India. Almost 58% of Biharis are below the age of 25, which is the highest proportion in India.

Today, Bihar lags behind the other Indian states in human, economic development terms. Economists and social scientists claim that this is a direct result of the skewed policies of the central government, such as the freight equalization policy, its apathy towards Bihar, lack of Bihari sub-nationalism (resulting in no spokesperson for the state). The economy of Bihar is largely service oriented, but it has a significant agricultural base. The state also has a small industrial sector. As of 2008, agriculture accounted for 35%, industry 9% and service 55% of the economy of the state.  Among all the sectors, the manufacturing sector performed very poorly in the state between 2002–2006, with an average growth rate of 0.38% compared to India's 7.8%. Bihar was the lowest GDP per capita in India, although there are pockets of higher than average per capita income. Between 1999 and 2008, GDP grew by 5.1% a year, which was below the Indian average of 7.3%.  More recently, Bihar's state GDP recorded a growth of 18% between 2006–2007, and stood at 94251 Crores Rupees ($21 billion nominal GDP). In the five-year period of 2004–2009, Bihar's GDP grew at a stunning rate of 11.03%. This makes Bihar the fastest growing major state. Bihar accelerated its growth rate to 14.8% in 2010-11.In actual terms, Bihar state GDP was ranked second out of 28 states, next only to Gujarat.

            After independence the state has faced apathy of the Centre through regular political neglect and misrule. The Chief Ministers of the state was imposed by the central leadership of parties, without caring about the individual’s maturity, ability and understanding to give the state a developmental thrust.  The education system of Bihar was purposely damaged and the youth of Bihar were misled to unproductive direction. Leaders in order to gain popular youth vote had damaged the education system by introducing cheap irrational policies of passing the students without English and other subjects. The popular policies of passing the students by letting them pass the examination by unfair and cheap means have misled the youth. This in return has led to the erosion of ideology.

 In the year 1990 Lalu Prasad Yadav became Chief Minister . By 2004, 14 years after Lalu's victory, Economist magazine said that "Bihar become a byword for the worst of India, of widespread and inescapable poverty, of corrupt politicians indistinguishable from mafia-dons they patronize, caste-ridden social order that has retained the worst feudal cruelties".

The name Bihar captured everything that was wrong with the old India — a combustible mix of crime, corruption and caste politics in a state crucible that stifled economic growth.

            In 2005, the World Bank believed that issues faced by the state was "enormous" because of "persistent poverty, complex social stratification, unsatisfactory infrastructure and weak governance". The people of Bihar - civil society, businessmen, government officials, farmers, and politicians - also struggle against an image problem that is deeply damaging to Bihar's growth prospects.   An effort is needed to change this perception, and to search for real solutions and strategies to meet Bihar's development challenge.  The new state of Bihar inherited major fiscal problems which persist. These include large fiscal deficits, a heavy and growing debt burden, imbalances in expenditure allocation, and institutional shortcomings in expenditure management and budget implementation. These were compounded by the separation of Jharkhand from Bihar, creating a division of staff, assets and liabilities, and adjustments to the state’s changed resource base. Though the government has responded to the fiscal crisis with measures such as new taxes to improve revenue performance and steps to reduce losses from defunct public enterprises, the fiscal challenges facing Bihar remain daunting.cal, educational and productive thrust of the Biharian Society.        

       However the picture of Bihar has changed drastically from a story of “Gloom to a Boom” and this has been due to the change in leadership in the state which has ushered excellent governance and economic vision.

 The New York Times “Asia Pacific” has revealed and how –“The improved governance, though slightly, has led to an economic revival. Bihar is a textbook case of how leadership determines development. Lalu Prasad, a wily populist politician whose party peddles a message of lower caste empowerment, ran the state for 15 years from beneath a banyan tree. Under Mr. Prasad’s watch, criminal syndicates kidnapped, extorted and robbed with impunity, protected by political leaders, or in some cases led by politicians. Mr. Prasad’s government did little to improve the daily lives of Biharis. Its already dismal roads disintegrated into impassable tracks. Its schools crumbled; teachers did not show up for work. Its health centers were left unstaffed. Bihar had some of the country’s sickest, poorest and shortest-lived people in India, a dismal catalog for a state that in its glory days, a few millennia ago, was home to one of South Asia’s most powerful empires and the place where the Buddha reached enlightenment.

“It was not a case of bad governance,” Mr. Nitish Kumar said in an interview. “Governance was completely absent from the state of Bihar.” When Mr. Kumar took over, he found government offices filled with dusty files and Remington typewriters. It was as if most of the 20th century had passed Bihar by. He tackled crime first. The order went down to the lowliest constable — the law was to be enforced, and criminals would be punished, no matter their political connections. Powerful men were arrested, many of them sitting members of Parliament and the state assembly. They were convicted quickly in fast-track courts. “That gave a clear signal that the law will prevail,” Mr. Kumar said.

As per BBC reports:-  For many years, Bihar in northern India has earned notoriety for being one of the poorest and most lawless states in the country.   Nobel-prize winning author VS Naipaul once described it as the place where "civilisation ends". But all is not lost, perhaps. We discover five areas where Bihar might consider itself to be ahead of other Indian states.

Bihar is the only state in India to have 50% of places in local municipal bodies reserved for women. Fast track courts in Bihar have convicted and sentenced more criminals than courts in any other Indian state in the past 18 months. Bihar is the only state in India where retired soldiers are being hired as policemen to stem the crime wave. Sudha a milk co-operative has begun "exporting" milk to other Indian states like Uttar Pradesh, West Bengal, Jharkhand and Delhi. Launched in 1993, the co-operative's revenues from a range of milk and milk products has risen from $73.5m in 2001-2002 to $136m today. The co-operative has 6,000 outlets covering 84 towns in the state. A simplified tax system conceived and launched in Bihar is now being emulated by Sri Lanka and various African countries and has been lauded by the United Nations. The UN was so impressed by the taxation model that it gave a $30,000 award to Bihar for introducing this method

Bihar has shown a marked improvement in women’s empowerment. Several program’s of literacy , financing, formation of SHG’s , reservation and employment have been specially carried out for women  Bihar, with female literacy at 53.3%, is striving to climb as the government has established educational institutions for women.. At the time of independence, women's literacy in Bihar was 4.22% and in 2001 it was a meager  33.57 %. Women were given 50% reservation in electorals for the first time ever in India. Of the 2, 60,000 representatives in Panchayats, a whopping 1, 20,000 are women. The Mukhyamantri Akshar Aanchal Yojna, aiming to make 40 lakh women literate in a year and providing bicycles to girls are populist moves, which have not only paid off but led to this sense of empowerment and fall in school dropout rates. Under this scheme, a schoolgirl gets a cheque of Rs 2,000 upon passing class VIII to buy a bicycle so that she can go to school every day.

We got reservation in local bodies, employment and social security and above all respect and dignity, which is hard to find in a male-dominated society,” said Pallavi Singh, a school teacher in Patna.
Woman power appears to have played a pivotal role in Nitish Kumar’s landslide victory in the assembly elections in Bihar. Women voters turned out at a higher rate than men, with 54.85% of registered female voters casting a ballot in state assembly elections that were spread over a month compared to 50.70% of male voters, according to an election commission official in Patna. “The turnout of women voters was over 60% in nine out of 38 districts in Bihar, while women outnumbered men in 23 other districts.”

  Presenting the State Budget and Survey report for 2012-13 Bihar’s Dpt. CM and finance minister Shri Sushil Modi said, "The per capita income in Bihar has increased to Rs 17,590 compared to Rs 8,528 in 2004-05 but it is still the lowest in the country and far behind the national average of Rs 40,000." The annual growth rate between 1999-2000 and 2004-05 jumped from 3.5% to 10.93% during the next five year period. Despite the economy under strain due to lower devolution by the Finance Commission, Bihar's GSDP at current prices in 2009-10 stands at Rs 1,68, 603 crore with per capita income of Rs 17,590.

Highlighting the results of the governance and fiscal management, he said the revenue surplus of state increased from Rs 2,498 crore in 2006-07 to Rs 6,272 crore in 2011-12. The capital outlay increased steadily from Rs 5,211 crore to Rs 11,448 crore during this period while development expenditure on social and economic services increased from Rs 17,000 crore to about Rs 43,000 crore. "The gross fiscal deficit has been 2.43% in the budget estimates of 2011-12, which is lower than the 3% limit fixed under the Fiscal Responsibility and Budget Management Act," the deputy CM said. Shri. Modi said between 2004-05 and 2010-11, the sectors reporting a growth rate of more than 15% were manufacturing (23.30%), construction (19.61%), communications (27.23%) and trade, hotels and restaurants (20.22%). There has been a fivefold increase in registration of new vehicles from 80,000 during 2005-06 to 3.87 lakh during 2010-11. Similarly, the number of mobile phone connections in the state increased to 4.48 crore in 2010-11 compared to 42.14 lakh in 2005-06.

The report also highlighted steady upward trend in per capita development expenditure (PCDE) during 2001-02 to 2010-11. From Rs 930 in 2001-02, the PCDE went up to Rs 3,467 in 2010-11, implying an annual growth rate of 17%. During the period, the country's PCDE grew at an annual rate of 13.6%. "The share of social sector spending in the total budget of Bihar increased from 18.9% in 2001-02 to 31.9% in 2010-11," Modi said. Between 2003 and 2008, the inflow of foreign tourists saw a near-six fold rise from 61,000 to 346,000. Last year, on aircraft movement, Patna airport registered a 42.8 per cent growth, the highest in the country, handling 7,456 flights compared to 5,220 in 2008-09. Bihar has emerged as brewery hub with major domestic and foreign firms setting up production units in the state. Three major firms — United Breweries Group, Danish Brewery Company Carlsberg Group and Cobra Beer — are to set up new units in Patna and Muzaffarpur in 2012.

Indian  and global business and economic leaders feel that Bihar now has good opportunity to sustain its growth and thus they have shown interest in investing in the state.

The Second Revolution of freedom in India

Freedom consists not only in the absence of restraint but also in the presence of opportunity. Liberty is not a single and simple conception. It has four elements – national, political, personal and economic.  The Constitution of India through its preambles has given its citizens its rights towards freedom. The man who is fully free is one who lives in a country which is independent; in a state which is democratic; in a society where laws are equal and restrictions at a minimum; in an economic system in which national interests are protected and the citizen has the scope of secure livelihood, an assured comfort and full opportunity to rise by merit. 

 The Preambles contains the structure of our Constitution, and spells out the aspiration of the people to secure for all its citizens Justice, Liberty, Equality and promote amongst the people a feeling of fraternity, ensuring dignity of the individual and the unity of the nation. Justice is further defined as Political, Social and economic Justice.  Indian people have got their Political independence on 15th August 1947, however social and economic justice is still not available to the people of India. The recent public unrest is an indication of the same.

             World Bank's latest estimate on global poverty states that India had 828 million people, or 75.6% of the population living below $2 a day. Sub-Saharan Africa, considered the world's poorest region, due of its geographical location and reasons, is better placed; it has 72.2% of its population (551m) people below the $2 a day level. Sub-Sahara is a desert and has extreme climatic conditions were life and vegetation is difficult to survive. However, Indian scenario is   different and the geographical location and Area, climate and resources (mineral, agricultural, vegetation, and climatic) are conducive for production of goods and services.    India, according to the new estimates, had 456 million people or about 42% of the population living below the new international poverty line of $1.25 per day. The number of Indian poor also constitutes 33% of the global poor, which is pegged at 1.4 billion people.  India is home to roughly one-third of all poor people in the world.

In the year 1976 Congress Government through a Constitutional amendment, amended the Preambles (the basic structure) of the Indian Constitution and added the words, Socialist Secular to Sovereign Democratic Republic. Then no Indian name was there in the list of top 100 capitalist’s of the world. Out of 64 years of independent India, Congress party has governed the country for over 53 years .  The Party  which had won the 2004 general election  on the slogan “Congress Ka Haath AAM ADMI Ke Saath, meaning thereby that  “The Congress hands are with the Common man”, has done little for the common man. In fact this has become just an slogan to attract votes.

            In the year 1991 Shri. Manmohan Singh the then finance minister and currently the Prime Minister of the Country began the economic reforms in India. The World Bank's latest estimates on global poverty shows that the rate of decline of poverty in India was faster between 1981 and 1990 than between 1990 and 2005. This shows that economic reforms, which started in 1991, have failed to reduce poverty at a faster rate. The gap between common man and Capitalist’s has widened. In the list of top 50 capitalist of the world there are as many as 7 Indian’s. According to the World Wealth Report recently released by Capgemini and Merrill Lynch Wealth Management, while most countries in the world have increased their High Net-Worth Individuals Count, India has more than doubled it – maximum compared to any other country in the world. . Political Parties are acting against the spirit of the Indian Constitution to build Socialist India has in fact helped the capitalists to amass wealth. India tops the list for black money in the entire world with almost $1,456 billion in Swiss banks, followed by Russia $470 billion, the UK $390 billion, Ukraine $100 billion and China, with $96 billion. Indian Swiss bank account assets are worth 13 times the country’s national debt. Most of this money has been stashed away in banks in ‘tax havens' abroad over the last 60 years by corrupt  politicians, industrialists, bureaucrats and middle-men.

The UPA government with Shri. Manmohan Singh, as its Prime Minister has been named as a Government of Scam’s. Every day new scams have been reported in media and billions of Dollars of public money is been diverted in corrupt hands of politicians, bureaucrats, middleman and industrialists. There is wide spread public unrest in India and people are protesting against the same. However the Government is defending its corrupt practices and any Individual or Institution which raises voice against these practices has to face the wrath of the government lead by the Congress party. Government machinery lead by Central Bureau of Investigation (CBI) has been pressed against the whistle blower and he is regularly been harassed by the Govt. machinery.  The CBI has now been renamed by people as the Congress Bureau of Investigation.  Reports of constitutional bodies as The Controller and Auditor General of India are thrown in waste baskets and shamelessly its validity denied. Image of people and Institutions pointing corruption are been tarnished and every attempt is made to spoil his public image.  The recent police atrocity on Baba Ramdev and his disciples in Delhi and the treatment received by the Government to Anna Hazare and Civic Society members has clearly revealed the same, and much is desired to be done in the direction of  personal, civil and national liberty.

     History reveals that India fell mainly because her people were at the critical hour divided and disorganised. Her influence waned when the forces of disintegration, political and social, were at work. If we left our neighbours alone, we revelled in internal strife which ceased for a time when great kings like Ashoka and Akbar ruled over the destinies of India – mighty men, who sought to unite the teeming millions of this vast sub-continent by the bond of a common aspiration and a passionate longing for the eternal code of righteous conduct, charity and understanding. A strong and united India fearing no one and loving all, brought messages of peace and goodwill to distracted world. But as soon as the sceptre dropped from their hands, when the grip over the country was loosened through weak and short-sighted successors, when narrow selfishness and mutual jealousy and distrust overpowered our souls, when local feuds and religious strife raised their ugly heads giving rise to social exclusiveness and moral decadence, unity was lost; freedom, man’s priceless treasure, disappeared.

            The public support to Anna Hazare in his effort to draft a Peoples Lok Pal Bill to fight graft and corruption has received wide support through out the country. People from each and every walk of life are lending support to this fight against corruption. Men’s and women irrespective of their caste, creed and religion were all assembling in public places singing patriotic songs and slogans to support this cause. Streets of the nation are lightened at midnight and people were out on road waiving the National Flag and burning candles in support of the Gandhian leader Anna Hazare. It appears to be the second  Fight for independence for the people of India.