Inflation - the hydra

 

Inflation – the hydra

B. Yerram Raju

Times of India Blogpost dated 29.04.2022.

Sweltering heat makes us look to June’s first monsoon showers as much as the monetary policy of the RBI looking at taming the inflation as its uppermost task. When Bloomberg mentions that the world is experiencing a synchronised inflation outbreak that previously seemed related to the US and Europe, and that producer prices are rising in Japan, South Korea, India, and all economies are feeling the heat of fuel and food prices, it has to be viewed seriously.

I tried to look at it from what is happening in the working class both in urban and rural areas in our country. Several state governments are indulging in competitive populism, notwithstanding the ever-rising fuel prices.

My house cleaner has a couple of acres of land in Mahbubnagar district of Telangana. She gets her minimum wages when she abstains from the work in our house, at least four days a month and seven days at least once in a quarter. Her logic: Every office has one Sunday and two second Saturdays as holidays. Why should I not get the same? She works as house cleaner for ten houses with an average income of Rs.2000 per month per household. She gets free ration; free medical treatment in the government hospital if she or her family members have illness or accident. Her husband is a fruit-seller on bicycle. His net income is Rs.15000 a month and recently he got a loan of Rs.10000 under the street vendors’ scheme that helped him buy a cooler to the house. She has put both her sons in a social welfare residential school. She is also not bothered about income tax though her family income exceeds the taxable income. She has Aadhar card and felt needless to have PAN card! She is least bothered about inflation.

In a chat with her, I and my wife realized that most house cleaners are in the same boat as her and they only have to pay rent. Some of them are also expecting to move to their own two-bedroom flat promised by the government. I went to a village on the way to a temple in Sangareddy district. That was a shandy day. Hence most villagers are in shandy either as buyers or sellers. I got down from the car, a little uncared for the anger of my wife. She knows that when I get down on such errand, I would take at least thirty to forty-five minutes to be back.

I enquired from around twenty persons regarding the price-rise. They mentioned only two things: one, Fuel price and two, Oil price. No others mattered to them. At least one person in every house has a motorcycle. Every family has a piece of land either owned or leased. They are bothered about the wages for the farm labour. They sky-rocketed. They are planning to go for farm machinery either in groups or go for hiring it to reduce farming costs. They are bothered more about increasing unrest in villages due to family feuds.

Inflation therefore has not figured much in the conversation. Rise in wages is an issue but related to inflation. Not that the rising inflation indices – consumer price indices crossing the RBI headline boundaries – is not a worry. The fact is that there are several factors that do not get into inflation accounting. The rents in urban areas are on the rise despite a boom in real estate and housing and cheap housing loans.

If interest rates rise, the cause will not be so much the inflation as the non-performing loans in the retail sector, protracted corporate loan recoveries after severe haircuts, under the most permissive route of Indian Bankruptcy Code proceedings.

Union government has a responsibility to look at the fuel prices beyond the revenues that are earned out of them. Most of the states have genuine concerns over the cess and it is time to be transparent and remove all the cess as the purpose for which cess is levied and spent are never coordinated. For example, look at the similar rise in fuel prices globally in 2014 and 2015 and the domestic prices. Can we get back to the comparable barrel prices and retail prices of fuel and gas?

Once the interest rates rise, the scope for real interest rates to pare up and comfort the savers exists and the hapless senior citizens will have a sigh of relief. Real interest rates are currently negative and hopefully the June monetary policy of the RBI will bend the hydra.

*Author is an economist and risk management specialist and the views are his own.

https://timesofindia.indiatimes.com/blogs/fincorp/inflation-the-hydra/