Inflation wreaks havoc on the poor and middle classes

Shazia Shah has stopped buying fruits and certain vegetables.

The Kashmir-based homemaker, whose husband works in a private company, took the step as she couldn’t find any other way to make her household budget work after the prices of essentials such as milk, meat, bread, vegetables and fruits skyrocketed.

“We have stopped purchasing fruits and vegetables like peas, cauliflower and lemon as it is beyond our budget. In the last two years, there has been almost a 100 per cent rise in our kitchen expenses and now we only buy those items which are necessary,” Shah told DH.

A dozen oranges sell at Rs 200-250 in Srinagar markets these days, versus Rs 140-179 at the start of the year. Grapes sell at over Rs 200 per kg, higher than the January price of Rs 120-140 per kg. One kilo of lemon sells at Rs 220-250, versus Rs 50-60 three months back.

About 3,000 km away, 35-year-old Parvathi had to switch to a wood-burning stove to make ends meet.

“The staple in my house is rotti and it takes a lot of gas to make it, so we have switched,” said the resident of Nayandahalli Slum Board Quarters in Bengaluru. Before the lockdown, she would cook on a gas stove and this involved lower effort as the smoke did not make her cough.

“Over a quarter of the households here have switched to a wood-burning stove,” she said.

Also read: Hiking interest rates to tame inflation not 'anti-national': Former RBI chief Raghuram Rajan

From Kashmir to Kerala, low and middle-income households, already battered by two years of the pandemic, are now experiencing the crushing effect of inflation. A perfect storm of geopolitical tensions in Ukraine, crop-related problems elsewhere and a post-pandemic fall in purchasing power has put food, fertiliser and fuel out of the reach of many Indians.

India’s wholesale price-based inflation jumped to a four-month high of 14.55 per cent in March due to a rise in crude oil and commodity prices, data from the Ministry of Commerce and Industry showed. Retail inflation soared to a 17-month high of 6.95 per cent during the same period, fuelled by a rise in prices of food items such as edible oils, cereals and vegetables, according to data from the Ministry of Statistics and Programme Implementation.

So, what happened?

Russia's invasion of Ukraine threw the global supply chain into disarray, boosting fuel, food and fertiliser prices across the globe. Russia is the second-largest oil producer in the world and India is the world’s third-largest importer of oil.

Crude oil prices, which ranged around $90 a barrel before the start of the Ukraine war in late February, soared to hit a 14-year high of $139.13 a barrel in March and continue to remain above the $100 mark. This has raised inflation and input cost pressures across sectors as India imports close to 85 per cent of its oil needs. The rise in crude oil prices will affect India’s import bill and also widen the current account deficit.

The huge spike in crude and commodity prices has also raised concerns about stagflation — a situation in which the inflation rate is high, economic growth rate slows, and unemployment remains at a steady high. It presents a dilemma for policymakers, since the actions they want to take to lower inflation may exacerbate unemployment.

State-owned fuel retailers in India began passing on the high import cost of crude oil to customers at the pump from March 22 after a four-and-half-month long hiatus. Petrol and diesel prices were raised by over 80 paise a litre on that day. Cooking gas also became pricier in March, delivering a one-two punch to the average Indian.

The country’s supply of cooking oil was also hurt by Russia’s invasion of Ukraine, which normally accounts for about half of the world’s exports of sunflower oil.

India is the world’s biggest importer of palm, soybean and sunflower oils. It buys palm oil from Indonesia and Malaysia, soybean oil mainly from Argentina and Brazil, and sunflower oil from Russia and Ukraine.

Also read: India has not breached inflation so badly, says FM Sitharaman

The Ukraine war came on top of a severe drought in South America that had already hurt the world’s soybean supply and pushed up prices of soybean oil. Brazil, Argentina, and Paraguay account for more than 50 per cent of the world’s soybean supply.

Edible oil prices had been rising even before the Ukraine war. Throughout the pandemic, crop-related problems abroad hurt India’s imports. While lockdowns hurt Malaysia’s palm oil production, dry spells in Eastern Europe hurt sunflower oil output. A lot of Indians also cooked at home during the lockdowns, pushing up prices of even locally produced mustard oil.

To make things worse, the recent ban on palm oil exports by Indonesia — the number one producer of the world’s most consumed edible oil — will push cooking oil prices in India higher and dent household budgets further as everything from biscuits to soaps that use oil as a raw material will cost more.

“Restrictions on Indonesian palm oil exports would pose input cost challenges for all fast-moving consumer goods companies — this sector faces the highest risk of earnings downgrades in this quarter,” said S Hariharan, the head of sales at a financial services firm.

Many in India prefer palm oil as it is cheaper than other alternatives. It is naturally resistant to oxidation and provides a long shelf life to items made with it, making it popular with hotels, caterers and other bulk users.

DH Toon | Inflation leaves students banging empty plates

As palm oil prices rise, other vegetable oils will also become pricier, said Akshay D’Souza, the chief of growth and insights at a retail intelligence firm.

The result will be felt across product categories.

“Bread, biscuits, instant noodles could see an increase in prices soon. This could definitely impact the common man, especially the daily wage earner who will see his nutritional needs getting challenged further,” D’Souza said, adding that eating out and spending on little luxuries such as chocolates, ice cream, pizzas and even lipstick will also cost a lot more than before.

Many Indians are unable to buy in bulk anymore despite the higher savings on bigger packs and have already shifted to buying lower-value packs across most product categories, including household must-haves such as soap and detergent.

“We do see home spending budgets for discretionary products getting limited and we could see a further strain on sales and the volumes,” D’Souza said.

Stung by high commodity costs, consumer goods makers from Hindustan Unilever to Britannia have already hiked prices or reduced grammage this year to protect their profit margins.

HUL’s ‘calibrated’ increases in prices helped it offset the impact of higher input costs in the quarter ended March 31, but the higher prices hurt volumes, which stayed flat.

HUL CEO and Managing Director Sanjiv Mehta highlighted “near-term concerns” around “significant inflation” and “slowing market growth” last week. The company, which hiked prices by roughly 10 per cent in the fourth quarter, warned of more “sticker shock” going forward.

“As things stand today, prices are going to continue to rise,” Mehta said, citing massive inflation and the impact of the geopolitical crisis in Ukraine.

The result: Many low and middle-income families are dipping into their savings or taking high-interest loans from money lenders to pay their food bills. Some people have started taking buses to commute to work instead of using their own vehicles or opting for cabs.

In some extreme cases, people are skipping meals or eating less altogether to make ends meet. Most people who spoke to DH have completely stopped spending on non-essential items.

The strain on household finances is palpable. For instance, the auto-debit bounce rate for retail loans rose 0.4 percentage points in March. In other words, the EMIs on certain retail loans are going unpaid because of inadequate funds.

Some, like Parvathi, have put away their gas stoves.`

“It seems that fuel consumption has been declining even before the Omicron set in and the trend to alternate sources of fuel like kerosene and even firewood may have gathered momentum and will possibly gather further traction in coming days. This does not augur well for rural demand,” SBI Group Chief Economic Adviser Soumya Kanti Ghosh said in a report.

What can RBI do?

March’s 17-month-high inflation number leaves India’s central bank with few options other than raising rates, and 43 out of 46 economists in a Reuters poll in April said they expected the Reserve Bank of India to raise the repo rate — the rate at which RBI lends to banks — for the first time since 2018 in June. While 42 predicted a 25 basis point hike to 4.25 per cent, one predicted a 50 basis point hike. One basis point is one-hundredth of one percentage point.

The US Federal Reserve was also expected to raise interest rates by 50 basis points at meetings in May and June. Central banks across the globe have already started raising interest rates to tackle multi-decade high inflation.

When a central bank raises interest rates, that makes money costlier and borrowing appeals less to people. This, in turn, makes them spend less and save more. When more people choose to save and demand cools off, it ends up taming the rate of increase in prices, better known as inflation.

India Ratings and Research, a credit rating agency, expects this deadly combination of war-triggered inflation, weak rupee and expected rate tightening by the RBI to make risky debt of Indian companies rise by Rs 60,000 crore to Rs 6.9 lakh crore in the current financial year.

“The more delay in acting, the greater the possibility you might end up being more aggressive,” Kunal Kundu, India economist at Societe Generale, told Reuters last week. “There are chances the RBI might have to eventually do a Fed.”

(With inputs from Zulfikar Majid in Srinagar, Reshab Shaw and Varsha Gowda in Bengaluru, Mrityunjay Bose in Mumbai, E T B Sivapriyan in Chennai, Mohammed Safi Shamsi in Kolkata, Sumir Karmakar in Guwahati and Arjun Raghunath in Thiruvananthapuram)