Does inflation hit the poor or the rich more?

Elementary, but…

The title may look ridiculous. Not so if you read the following statement in the Union Finance Ministry’s monthly economic review for April: “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.”

Small wonder that the tweet on the subject became a subject of ridicule 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.” But the statement made in the Finance Ministry report remains.

Cost of living

When prices of commodities that people ordinarily consume increase, the cost of living goes up. Their income remaining the same, they are able to buy less than before. 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 the 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.

The largest component of the Consumer Price Index (CPI) is the food and beverages group, accounting for 46% of the total. Of this, cereals and products account for 10%. Food price inflation surged to a 17-month high of 8.38% in April from 7.68% in March. In April, rise in prices of cereals and products touched a 21-month high of 5.96%, largely reflecting the failure of procurement and unregulated wheat exports. The prices of vegetables and spices surged by a 17-month high of 15.41% and 10.56%, respectively. Evidently, the poor who spend a larger part of their income on these goods are severely affected.

Fuel prices

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

The taxes on petrol and diesel have been increased 12 times since 2014. As a result, the tax on petrol rose nearly three times from Rs 9.4 per litre to Rs 26.77, and the tax on diesel nearly nine times from Rs 3.56 a litre to Rs 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.

As a result, revenue from fuel taxes rose from Rs 1.72 lakh crore in 2014-15 to Rs 4.55 lakh crore in 2020-21. The total revenue the government has earned from fuel taxes in the last eight years is Rs 26.52 lakh crore. On average, then, every Indian household has paid about Rs 1 lakh in fuel taxes alone in this period. It has been a clear case of looting the poor.

Rigged markets

The Modi government was fortunate. Its ascendancy coincided with a decline in international crude price. But it escalated the tax, including during the pandemic, in a way calibrated to ensure that the gains of lower crude prices were not passed on to consumers but was instead mopped up as additional tax revenue.

When crude price began to firm up, the Modi government refused to reduce the tax -- until the danger of runaway inflation became visible. In November 2021 and May 2022, it reduced taxes on petrol and diesel cumulatively by Rs 13 and Rs 16, respectively. Yet, this is only a partial reduction of the total burden heaped upon consumers during the Modi regime. It is unwilling to roll back the entire hike in fuel taxes effected since 2014. It is clinging on to an effective additional tax of Rs 12.27 on a litre of petrol and Rs 10.47 on diesel that have been added since Modi came to power.

Generalised inflation

There is yet another factor that is pushing up the cost of inputs -- the depreciation of the rupee. From Rs 64 to a dollar, it has fallen to nearly Rs 78, raising import costs.

The Wholesale Price Index (WPI) has been continually much above the CPI. In April, it climbed to a 30-year high of 15.08% due to an across-the-board rise in prices in all segments. The persistent high input prices may be absorbed by manufacturers for a short while, but sooner or later, it will be passed on to retail prices. Thus, the worst is yet to come.

The beneficiaries of inflation

The final buyers – consumers – will end up transferring 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. And the government also stands to benefit, as our brief discussion on oil prices has shown. It is the people and the country that stand to lose.

A recent Oxfam report ‘Profiteering from Pain’ said 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.

Countermeasures

The major counter-inflation intervention has been to raise the interest rate by 0.4 percentage points and the 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 monetary policy will retreat to its 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 demand will have 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 fuel will have to be rolled back. Cereal procurement must be speeded up and the public distribution system (PDS) strengthened.

The oligopolistic pricing by business 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 PDS, have relatively lower retail prices than the rest of the country.

(The writer is a former finance minister of Kerala)