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Economy

If There Was Political Will, India’s Raging Cost of Living Crisis Could Be Eased

While the government is happy to externalise the crisis to the invasion of Ukraine alone and its effect on fuel prices, it is the food inflation that has seen a much sharper upward swing.

This article is the fourth in a series on the state of the Indian economy co-curated by the Centre for Financial Accountability, New Delhi and The Wire. Read the first article here, the second here and the third here.

“Science of producing unreliable facts from reliable figures”: That’s what Evan Esar, an American humorist, had to say about statistics. One can identify with the frustration. For a lay person, often it becomes difficult to fathom where we are really headed as an economy. Are there green shoots or dry roots? Statistics are often perplexing. The reassurances from the finance ministry often don’t stand the simple test of vegetable or grocery shopping in the bazaar. Is there a recovery? Whose recovery? At what cost? Who is paying the cost?

Just for illustration, let’s look at the graph below (Figure A).

Fig A. Consumer Confidence Index Sep 2021 – Jul 2023. Source: RBI

What you will see is recovery.

This is the consumer confidence (current situation) index. It is supposed to give a sense as to how optimistic or pessimistic consumers are regarding their expected financial situation and the country’s economic condition. Consumer optimism indicates they will spend more and stimulate the economy. Consumer pessimism can lead to postponing spending and thus stagnation.

In the graph above, it does look as if after the pandemic, things are getting back into shape – a nice linear projection trend that will validate the claims of the government. But that’s the thing with statistics, they can hide more than they reveal unless we clarify our reference points and ask a few probing questions. In this instance, let’s just zoom out and see the picture below (Figure B).

Fig B. Consumer Confidence Index Mar 2015 – Mar 2023. Source: RBI

Voila! The optimism disappears. The linear trend projection seems to be only an optical illusion created by the preceding sharp dip caused by the pandemic and harsh lockdowns. We don’t really need a graph to validate that people are buying relatively more than in the depths of the lockdowns and deaths. So Figure A hardly merits celebration. It is Figure B that is more important and worrying. It is also probably the only phenomenon under the present government that can be characterised by the word “secular”. As it shows that the general trend has been a secular fall from 2015 onwards (see the trend line). It is symptomatic of the slump in demand that in fact preceded the pandemic.

The latest results of the consumer confidence survey by RBI in fact shows that the current situation index has dipped again in July 2023 and is a shade lower than the previous survey. Overall, it shows a downward slippage from 108.6 points in the round of March 2015 to 88.1 points in July 2023. The declaration of Amrit Kaal from the Red Fort does not seem to have given much confidence to the citizens. As far as future expectations are concerned, except for the grim outlook about prices, the survey otherwise shows a marginal positivity. But again if one zooms out, the future expectation index has in fact slid down from 126.7 in March 2015 to 116.6 in July 2023.

The new beast to worry about, however, is the cost of living crisis.

India’s retail inflation remains high at 6.83% in August 2023 after a 15-month high of 7.44% in July. What may appear to be a slight dent needs to be qualified with the fact that it is on top of an already high base of August 2022. There has been an increase in the inflation rate of fuel and light segment from 3.67% to 4.31% which remains worrying. What the numbers often don’t end up conveying are the social implications of the cost of living crisis and the ways of coping the poor are forced into.

Over the last two years, the invasion of Ukraine and supply cuts by Saudi Arabia and other OPEC+ nations have pushed up fuel prices at an astonishing pace which was closely followed by a rising tide of food price inflation. Added to this was the continued levy of astronomical taxes on fuels at retail outlets by the Union government. The unorganised sector in particular (that employs nearly 85% of workers) where wages are never adjusted for inflation, has suffered the brunt, its back being broken by the successive shocks of demonetisation, GST and finally the sudden and harsh lockdowns. In FY 2022-23, the gross savings of Indian households stood at 5.1% of GDP, the lowest in at least 23 years. While during the pandemic, it is the lack of work and incomes that ate into the meagre savings of the poor, by the time they were hoping to recover, the steep rise in prices has once again been further depleting their savings as incomes have hardly been able to keep pace with inflation.

For instance, while the wages of construction workers and agricultural workers have increased by only 10.5% and 12% respectively in rural India from April 2021 to March 2023, the cost of cereals have increased by a whopping 22%. Add to it the fuel segment of the index that has increased by 16% and the cost of milk and milk products that has increased by 14%. Higher price prevailing in the retail market effectively shrinks the disposable income in the hands of the people, which in turn acts as a dampener on demand for consumer products as people postpone non-essential purchases.

Figure C below shows the gap between the wages of construction workers as compared to fuel prices, and food and beverages prices in rural India.

Fig C: Annual Variation: CPI – R across (food & beverages & Fuel & Light) and Rural Wage Rate.
Note: Annual Variation is computed by taking the annual average of months in a FY & annual avg. of monthly wage rate (CPI Base Year : 2012 = 100).

Across the food and beverages and fuel and light segments under the rural component of the index, there has been an upward trend. During FY 2015-16, the annual average of months of the index stood at 118.4 and 124.4 points, which have  reached 189.5 and 185.9 with an inflation rate around 8.9% and 3.8% respectively in August.

The alarming stagnation in real wages, as highlighted by economist Jean Dreze, encapsulates the crisis. The growth rate of real wages, he goes on to show, was below 1% per year between 2014-15 and 2021-22. It was 0.9% for agricultural labour and 0.2% for construction workers. It is pertinent to look at the recently released State of Working India Report 2023 which captures the phenomenon of a dramatic rise in self-employed workers, particularly among women, since the pandemic. This is another factor that pulls the real wages down, given that the self-employed saw the highest fall in earnings in recent years.

Is war the only factor contributing to the price rise?

While the government is happy to externalise the crisis to the invasion of Ukraine alone and its effect on fuel prices, if one again looks at Figure C one sees that post FY 2020-21, it is the food inflation that has seen a much sharper upward swing. What is most disconcerting for the economists is the fact that this has relatively been a time of comfortable levels of domestic food production. As such, the impact of the apprehended below normal monsoon on food production and thereby on the already high food prices is worrying. Ironically the high food prices did not benefit the farmers who grow the food.

While that may be, let’s nonetheless look at the fuel prices and its supposed “externality”. One of the prime factors behind the fuel prices are the heavy taxes. One of the major sources of revenue for the Union government during the COVID crisis was through taxes on sale of fuels such as petrol and diesel. (Bulk of the excise duty being an amalgamation of different cess and thereby the Union does not even have to share revenue with state governments). But it is an avenue of tax collection that hurts the common people at a time when their pockets were the shallowest owing to the pandemic. The average annual tax burden on fuel in the difficult years of 2020-21 to 2022-23 was Rs 4.07 lakh crore (See Figure D). But was this the only avenue for raising this revenue? Far from it. In a country that is witnessing one of the most grotesque inequalities between the top 1% and the rest, we could have easily raised the same or even more by taxing the wealthiest handful.

Fig D: Trend in the revenue generated through taxes / duties that  Union has levied on the petroleum sector over the years. Source: Petroleum Planning & Analysis Cell

Hypothetically, if the government was to be mindful of the enormous burden of rising prices that this is adding to the common people’s woes and had revised its tax rates to the pre-pandemic (2019-20) level, then the estimated loss of revenue in the difficult years would have been Rs 1.19 lakh crore. If a flat wealth tax rate of 2% was imposed on individuals with net worth of Rs 1,000 crore or above in 2021, that is, if the wealthiest 1,007 families in the country were taxed, we could have raised Rs 1.84 lakh crore in just a year. A wealth tax of this nature if constituted (as it was done in Argentina, Bolivia, Colombia and so on after the pandemic) could have helped us not only to shield the poor from the soaring fuel prices, but also recover better by increasing welfare spending.

Instead, we tied ourselves to a K-shaped recovery wherein rising prices and dwindling income has forced the poor to cut back expenses on food and other essentials. Meanwhile the ultra rich are spending on imported liquor, luxury cars and leisure as evidenced through both sales and import data. As per Credit Suisse, the number of USD millionaires in India is projected to more than double by 2026. Meanwhile we await this year’s hunger index as to where we move from our unenviable slippage to 107th position. Grand events, divisive politics, an army of social media bots and a pliant traditional media have kept the people distracted from the pinch. The question is, for how long?

Anirban Bhattacharya is Team Lead, National Finance Team and Pranay Singh is Data Analyst at Centre for Financial Accountability.