The only thing going up!

Explore the Inflation plaguing India in 4 minutes..

Sep 16, 2020

Blinders on to the COVID figures, and what’s the only thing going up?

— Inflation, it is.

Remember… we talked about how India managed the double feat in a previous article? Well, now we have a new milestone, a triple feat. It’s official… India’s retail inflation for August 2020 is a troublesome 6.69% ! For months in a row, inflation has been consistently above RBI’s target range (2 to 6 pc). And it’s incumbent on us to talk about that…

Well, for the layman, Inflation is the increase in price of an average consumer basket. It makes goods and services costlier for you and thus, reduces the purchasing power of your money. You can measure it with the help of two indices, CPI (Consumer Price Index) and WPI (Wholesale Price Index). As the name suggests, CPI peeps into consumers’ baskets, whereas WPI talks of wholesalers and manufacturers. While CPI for August stood at 6.69%, the WPI was 0.16%. Pertaining to its large-scale impact, ‘rate of change in CPI’ is considered synonymous to inflation. Simply put, if you managed your monthly expenditure in ₹40000 in August 2019, extremely sorry to say, now you have to cough up an extra ~ ₹2800 for the same (=40000*6.69%)! And not only that, inflation, just like rust, corrodes the value of your investments! Because even if you earned a 5% return on your investments (ROI), your net return isn’t a whole number! Now you realise.. it’s indeed an issue!

Btw, India is making headlines again. Consider, for instance, the following chart —

You see.. the worst affected countries (even those which had low growth), the likes of US, Italy, UK, Spain and Brazil have clocked close to zero inflation rates. Whereas India has a toxic combination of high inflation and the lowest growth rate! That’s indicative of Stagflation (Inflation + Low growth + High unemployment).

And that brings us to the question - why so? Note that increase in demand for goods makes more people chase fewer goods and hence, inflates the prices. (That’s basic micro-economics.) But now, in India, there is hardly any sign of demand revival. Then, what’s it that we attribute our tragedy to? Well, let’s discuss that...

First thing first, we need to know what all fuelled this price rally. I’ve prepared an info-graph that reflects the inflation in individual components of CPI —

(Well, prices of food and fuel are very sensitive. You must have experienced the volatility. Hopefully, inflation in both these categories may come back to normal once economy is back in good mood. But what raises a red flag is the Core Inflation - inflation without considering food and fuel. It’s as high as 4% ! And that’s a grim concern.)

Okay, so, back to the question - what brings us here? What can we attribute our agony to? Hold on, time for a post-mortem…

Supply chain disruption

You must have guessed; this is today’s most talked-about justification. For instance, enter the supply chain of food-grains. Powered by a good monsoon and a bumper harvest, farmers had a good time producing crops. However, floods in some states and uncertainty blues among farmers led to reduced production. Then what? Nation went into a lockdown and transportation facilities were halted. Reportedly, there was also an increased rate of hoarding by intermediaries. Thus, a large proportion of produce (about 60%) couldn’t reach the sabji mandis. This meant lesser goods available at hand to meet the demand of people. And when supply is significantly lower than demand, prices tend to rise. Now you know why prices of potatoes have increased by 83% over the year, while onions and tomatoes are scaling new heights!

Surge in taxes

Price of liquor has surged 25.5% over the year, beer 26.6% and toddy over 19.7%. Why, you ask? Well, that’s attributable to surge in tax rates. Economy was in a turmoil and the states were running out of funds! How do they create revenue? Well, the smokers and drunks have to bear the burden. Excise duty on alcoholic beverages was hiked. And oh, who can forget that infamous 70% ‘corona tax’ imposed on liquor by Delhi Government (that was revoked later on). Clearly, these accounted for high inflation in sin goods. Also, taxes were increased on fuel (including ‘corona tax’) that served dual purpose by pushing cost of fuel as well as cost of transportation. Ergo, we saw petrol and diesel prices touch the peak!

Safe haven

Gold never gets old, not for Indians atleast. In times of uncertainties, people rush to buy gold because it’s considered a safe haven (a secured zone), and for Indians, that piece of metal is an emotion! That explains why ‘Personal care and effects’ (gold and silver) category, as you saw, has registered a substantial inflation rate. Btw, this was also powered by increased global prices and a weak rupee. And now you know why gold breached ₹56000 (per 10 gm) and silver touched ₹77000 (per Kg) in August!

(P.s.: One of the primary driving forces of price is the availability of easy money in the market. But that’s a broad topic and we’ll explore that in the next article. Stay tuned!)

The impact of inflation can’t be overstated! Consider farmers, for example, it’s baseless to say that inflation in price of food-grains must have given a boost to the income of farmers. Because most of that inflation, as we discussed, was due to pricing power of intermediaries and the supply chain disruption. Moreover, reports speak that farmers were net buyers of food (bought more than they sold). Hence, the price inflation of goods could have minimal benefit to the farmers. This way, if you see the bigger picture, this stagflation can deepen the (already deep) income inequality in India!

Ergo, the onus is on the RBI to turn the corner. And we know it will. Hopefully so…

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