Upsurge affects poor the most, govt. must retool policy to ensure that inequalities do not deepen

Christophe Jaffrelot and Trishali Chauhan write: Inflation is here to stay because it has much to do with the decline in value of the rupee that has fallen to its lowest, which makes imports of oil and gas more expensive.

Inflation is back with a vengeance in India. The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) show an upward rising trend, annually, at 13.11 per cent and 6.07 per cent respectively. Inflation is here to stay because it has much to do with the decline in value of the rupee that has fallen to its lowest, which makes imports of oil and gas more expensive. The war in Ukraine has the same effect and pushes the price of some food items upward.

This upsurge of inflation is affecting the poor more than any other social group because some of the commodities whose prices are increasing the most (like petrol and certain food items) represent a larger fraction of the budget of the most vulnerable sections of society. For instance, WPI and CPI inflation rates of food were at 8.5 per cent and 5.9 per cent, respectively.

As a result, inequalities — which were already on the rise — are increasing further. Recently, the State of Inequality in India report showed that an Indian making Rs 3 lakh a year belonged to the top 10 per cent of the country’s wage earners. It added: “If an amount like this comes in the top 10 percentile, then the bottom-most condition cannot be imagined.” Inequalities are also increasing among salaried people, who are privileged compared to those of the informal sector: The bottom 50 per cent account for only 22 per cent of the total salary income.

The situation of the lower-middle class and poor is deteriorating. A recent report from CRISIL pointed out that the data from the Reserve Bank of India shows slow farm wage growth in nominal terms: From an average of 6.6 per cent in fiscal 2021 to 5.7 per cent in fiscal 2022 (April-November average). This is below the inflation rate. Further, the non-farm wage growth halved to 3.2 per cent from 6.4 per cent — twice below the inflation rate.

Inequalities are obvious in many domains, including healthcare — a sector in which government spending is facing cuts. India’s spending on healthcare is among the lowest in the world. It has a thriving private healthcare sector, so much so that the country is a hotspot for medical tourism. But a decent level of healthcare is available only to the ones who can afford it because of increasing out-of-pocket expenditure — the payment made directly by individuals for the health service, not covered under any financial protection scheme. Overall, these out-of-pocket expenses on healthcare are 60 per cent of the total expenditure on public health in India, which is one of the highest in the world.

Inequalities are largely a result of policies. In India, this is particularly true of the way the government increased indirect taxes (such as excise taxes). Such action is often the most unfair as it affects everyone, irrespective of their income. Taxes on alcohol and petroleum products are cases in point. That some state governments also imposed their own taxes explains why India had one of the highest taxation rates on fuel in the world. The share of indirect taxes in the state’s fiscal resources has increased under NDA II (from 2014 to 2019) to reach 50 per cent of the total taxes in 2019 — against 39 per cent under UPA I and 44 per cent under UPA II.

In contrast, the big companies are flourishing, again, partly because of certain fiscal policies. The government’s budget in 2015 substantially lowered the corporate tax. It has persisted with this policy. In September 2019, it reduced this tax for existing companies from 30 per cent to 22 per cent; for manufacturing firms incorporated after October 1, 2019, that commence operations before March 31, 2023, the tax was reduced from 25 to 15 per cent — the biggest reduction in 28 years. In addition to these tax cuts, the government withdrew the enhanced surcharge on long- and short-term capital gains for foreign portfolio investors (FPIs) as well as domestic portfolio investors. These pro-rich decisions were some of the reasons why indirect taxes “had to” increase.

These government policies are clearly promoting the supply side at the expense of demand, whereas the RBI’s recent decisions are already affecting demand and companies’ investment capacities. The central bank has raised interest rates and CRR in an attempt to curb demand, but demand in the country is already choking. This is also why investments are in decline. Such measures may precipitate the approaching crisis.

Though the government is opting for market-based economics, currently, India needs a mixed solution that comprises price stability via government channels and subsidies.

For three years, including this fiscal year, the special category inflation was higher by 180 basis points. A higher allocation of funds for MGNREGS in rural areas, as well as the introduction of similar employment generation schemes in urban areas, should, therefore, be a priority. At the state level, the development of municipal bond markets could be a plausible alternative. A reduction in the excise duty on fuel prices and easing the fuel tax burden could also supplement the disposable income and reduce the input cost burden for producers.