This world is like a prism. You see different pictures, colours and hues depending upon from which angle and under what light you are viewing the world. Therefore, while all views and colours are equally valid, your "truth" is always what you see from the point you are standing at a given point in time and under the current light.
In the past few months, inflation has become one of the driving narratives of monetary policy world over. From Brazil to Britain, and Australia to the Eurozone, the central bankers have expressed concerns over rising prices. Over 30 central banks have actually raised policy rates in the past 12months to control inflation. The US Fed is also widely expected to embark on a path to accelerated rate hike from next month onward.
Insofar as the monetary policy impact on inflation is concerned, in my view, in the latest episode, inflation (rate of increase in the prices) is not the only problem. It is the current price level that is hurting people severely. Hikes in rates will only curtail demand. This may not necessarily bring down the prices. The effort needs to either increase the income of common people or materially augment the supply of essential goods to bring down the prices from the current levels.
I have spoken to a number of people from various sections of society in the past one month to understand how inflation affects their lives. Not surprisingly, all of them had different perceptions about inflation. Obviously, they all view the issue from their own angle and under the light of their own circumstances. If I could extrapolate the feedback of these people—
(a) For almost half the population, primarily living in rural areas, ideally food inflation ought not be a matter of concern. A farmer should gain maximum from the food inflation. Given that over 60% of the population is engaged in the farming and related activities, theoretically consistently high food inflation should result in transfer of wealth from non-farm sector to the farm sector. But this has not been the case in any of the high food inflation episodes in the past seven decades. The gap between rural and non-rural income and wealth has been consistently widening.
The reasons could be un-remunerative prices for the crop and higher than food inflation in healthcare, agri input, energy and transportation.
(b) Urban, semi-urban households suffer from a variety of inflation. Prominent amongst these are education, health, energy, transportation, communication, rental, protein, fruit and vegetable. The political rhetoric and central banker's focus exclude many of these critical elements in their fight against inflation. Lack of good public healthcare, education and transport services, energy efficiency, affordable housing, and better employment opportunities closer to home is hurting this class the most.
The expense on food for a typical Indian middle class family is about 30-40% of their income. A typical middle class household saves 20% of his income. If food inflation is 10%, a 3-4% rise in nominal income would be needed to offset that. Besides, they would need sufficient rise in nominal income and asset prices and interest rates to offset the erosion in real value of their savings. This perhaps has not happened in the past many decades, implying that the nominal rise in asset prices and interest rates have not been consistent with the general rise in price levels. The wealth is thus consistently getting transferred from savers to borrowers.
(c) Debt laden infra and realty developers are more concerned with inflated cost of capital and wage inflation. Energy and transportation costs also bothers them. This section needs better execution standards, simpler administrative procedures, automation, good corporate governance structure, stricter compliance norms and a vibrant retail debt market to alleviate the problems they face. Vegetable and edible oil prices do not bother them much.
One could argue that transfer of wealth from farmers and the urban middle classes to traders & indebted industrialists is a function of risk they take. But if we consider the history of NPA cycles, and exploits by moneylenders this argument gets weaker. Large borrowers have been consistently transferring the risk to public sector banks, and hence the common public, through frequent defaults. The money lenders in the informal sector have been fairly successful in exploiting the household and farmer borrowers, not allowing any benefit of inflation to them.
Actually, maintaining the negative real rates for households (household inflation minus term deposit rate) for a long period is the biggest scam perpetrated on the poor people of this country. The inflation tax, as I call it, paid by poor and middle class savers for cheaper financing of “crony socialism” and unscrupulous businessmen, has after all caused serious damage to the basic fundamentals of the Indian economy.
For a common man like me on the street, who is blissfully ignorant of the principles of economics and public finances, inflation is nothing but an enigma. The rising prices do hit him hard, but that also lead to a rise in his nominal income and hence social stature. Higher nominal interest rate on his savings, higher notional value of his house & jewellery; and higher rental for the spare room on the top floor does provide him some psychological comfort.
For a common man, inflation might be more of an income inequality issue. For many decades, inflation has been a medium of wealth transfer from common man to the rich. The current raging debate over rise in prices of food therefore has to be seen from this angle also.
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