Profiteering from Pain: Inflation benefits sellers & the Govt while people are getting poorer

Inflation impacts the rich more than the poor. The statement may well sound ridiculous but not so if you read the following statement in the monthly economic review for April published by the Union Finance Ministry:

“While inflation is expected to be elevated in 2022-23, mitigating action taken by the Government and RBI may reduce its duration. Evidence on consumption patterns further suggests that inflation in India has a lesser impact on low-income strata than on high-income groups,” it read.

Small wonder that the Finance Minister's tweet to this effect became the subject of general ridicule on social media platforms and the Finance Minister had to issue a denial:

“A Tweet with the picture of Union Finance Minister @nsitharaman is being circulated claiming that the Finance Ministry has stated - 'Inflation will affect the rich more than the poor in 2022.' The Claim is fake. @FinMinIndia has not given such statement,” the Press Information Bureau (PIB)’s fact check division posted on its Twitter account.

But the statement quoted earlier in the Finance Ministry’s official report remains.

True, the country has been through grimmer inflationary circumstances. The Consumer Price Index (CPI) for April 2022 was 7.8 per cent. The situation has been worse a few times over the years, impacted by oil price hikes, financial crises or major conflicts. But now the relentless increase in prices has once again become a major socio-economic issue.

Cost of Living

The synonym for CPI is the Cost of Living Index. As the name itself implies, when prices of commodities that people ordinarily consume increase, the cost of living also goes up. This means that their income remaining the same, they can purchase less when compared to the period before the inflation. Thus, their “real” income declines, and living becomes difficult.

The above is more relevant in post-Covid conditions. National income has barely recovered to pre-Covid levels and the debt overhang of Covid times is high. The unorganised sector where most people earn their living has been shattered by demonetisation and Covid. For these reasons, the present inflation bites deep.

Food Prices

The largest component is the food and beverages group accounting 46 per cent of the total. In this group, cereals and products are the largest component with a weight of 10 per cent. The food price inflation surged to a 17-month high of 8.38 per cent in April from 7.68 per cent in March.

In April, prices of cereals and products touched a 21-month high of 5.96 per cent, largely reflecting the failure of procurement and unregulated wheat exports. The prices of vegetables and spices surged to a 17-month high of 15.41 per cent, 10.56 per cent respectively. Evidently, the poor who spend a larger part of their income on these goods get severely affected.

Fuel Prices

The persistence of high and rising oil and coal prices have contributed to the economy wide effect of inflationary pressures. Petroleum being a basic intermediate product, sooner or later this outcome was inevitable. The escalation of international crude oil prices undoubtedly is the primary factor responsible for fuel inflation, but the government of India’s escalation of taxes in the petroleum sector is equally responsible.

The taxes on petrol and diesel were increased 12 times since 2014. As a result, the tax on petrol rose nearly three times from ₹ 9.4 to ₹ 26.77 and the tax on diesel nearly nine times from ₹ 3.56 to ₹ 31.47. There is no parallel in Indian financial history of such a cold blooded and astounding hike in the tax rate for any commodity.

The result has been that the revenue from the petroleum sector increased from ₹ 1.72 lakh crores in 2014-15 to ₹ 4.55 lakh crores in 2020-21 and to ₹ 4.16 lakh crores in 2021-22. The total sum of the revenue of the Modi government from petroleum taxes during its 8-year period is ₹ 26.52 lakh crores. The total number of households in India would be around the same number which implies that on an average an Indian household paid ₹ 1 lakh as petroleum tax. It has been a clear case of looting the poor. The petroleum tax to GDP ratio of the Central government increased from 0.8 per cent in 2014-15 to 1.9 per cent in 2020-21.

Rigged Markets

Fortunately for the NDA regime, its ascendancy coincided with the decline in the international prices of crude oil. The tax escalation was calibrated to ensure that the gains of lower crude oil prices were not passed on to consumers and mopped up as additional tax revenue. The protests were muted because there was no increase in the retail prices. Even during the height of the pandemic, taxes were raised ruthlessly.

But at a time when the international crude oil prices began to firm up, the Central government refused to reduce the tax until the danger of inflation getting out of hand appeared on the horizon.

In November 2021 and now this May 2022, the government reduced taxes on petrol and diesel cumulatively by ₹ 13 and ₹ 16 respectively. Yet, this is only a partial reduction of the huge increases that have been heaped on the nation during the period of the Modi government. The government is unwilling to roll back the entire hike in taxes on petroleum effected from 2014. The Modi government is clinging on to an effective additional tax of ₹ 12.27 for petrol and ₹ 10.47 for diesel, which have been added since it came to power.

Generalised Inflation

There is yet another factor that is pushing up the cost of inputs - the depreciation of the Indian Rupee. From ₹ 64 to a dollar the exchange rate has come down to nearly ₹ 78 to a dollar. This means that to import the same units of commodities or services purchased at ₹ 64 in 2014, the importers would now have to cough up ₹ 78.

The Wholesale Price Index (WPI) has been continually much above the CPI and in April 2022 it climbed to a 30-year high of 15.08 per cent due to an across-the-board rise in prices in all segments. The high and persistent input prices may be absorbed by the manufacturers in the short-run at the expense of their profits but in the medium term it would be passed on to the retail prices. Therefore, the worst is yet to come.

The Beneficiaries of Inflation

The ultimate buyers, the consumers, would have to transfer a substantial portion of their income to the sellers - the traders and manufacturers. Inflation is a process of transferring income from the buyers to the sellers. It is very unlikely that the primary producers whose markets are controlled by the former would benefit from the commodity boom. And the government also stands to benefit as our brief discussion on oil prices has shown. But the people and the country stand to lose.

A recent Oxfam report 'Profiteering from Pain' has concluded that every 30 hours, one billionaire is born while nearly one million people crash into extreme poverty. The system is so rigged, that whether it be Covid recession or post-Covid inflation, the rich gain and the poor lose.

Counter Measures

The major counter inflation intervention has been to raise the interest rate by 0.4 percentage point and mandatory cash reserve ratio of banks by 0.5 percentage points. It is evident that the policies pursued during the last two years will be reversed in the coming months and the monetary policy will retreat to the pre-Covid moorings.

The above approach assumes that excess demand is a major factor in triggering inflation. But more important are the supply side constraints pushing up the cost. It is more a cost push inflation than the classic demand-pull inflation. The attempt to squeeze the demand would have serious adverse consequences for growth. It can undermine the recovery.

Therefore, more resolute action is required on the supply side. The entire additional taxes imposed on petroleum products will have to be rolled back. Cereal procurement must be speeded up and the public distribution system strengthened. The oligopolistic pricing by business house cartels must be curtailed and competition promoted. It may be noted that the two southern States of Kerala and Tamil Nadu, which have a more robust public distribution system, have relatively much lower retail prices than rest of the country.

(Dr. T.M.Thomas Isaac is the former Finance Minister of Kerala) (Syndicate: The Billion Press)