Who Benefits From Inflation and Price Rise?
The simple definition of inflation is when demand exceeds supply and it results in prices of such items going up. They will keep going up till supply and demand do not come to a new equilibrium. There are many other factors which operate together to cause a country's economy to go into an inflation mode. Like business cycles both inflation and recession (opposite of inflation) also last for long periods of time. Best of economists also are not able to predict how long inflation / recession cycles will last.
Since last many years India has also been undergoing inflation especially in food items like vegetables and fruits, cereals etc. The average inflation rate from 2012 to 2014 is around 9.76% with the highest being 11.6% in November 2013 and the lowest recorded 7.55% in January 2012. In India the inflation is measured based on the Wholesale Price Index (WPI) movements on a monthly basis. The figures are collected and issued by the Ministry of Commerce.
India is supposed to be an emerging economy or a developing economy. It is commonly accepted that in such economic systems levels of inflation are relatively higher. One of the main reasons is the fact that there is always going to be a lag between creation of productive assets before they can start supplying the short items and help reduce the demand supply gap and ease the prices and inflation. In reality while the production assets do get created over a period of time however neither the inflation nor the prices come down significantly.
One of the reasons for this is that a section of society is fueling the demand leading to higher prices while the already consuming section of the society gets compensated for this very higher price rises. Thus the cause gets neglected and the effect gets compensated. How this happens.
The various subsidies and schemes like MNREGA implemented by the government have resulted in increasing the purchasing power especially of the rural poor. This has led to a spurt in demand of basic food items including protein delivering items like pulses and animal foods. This has resulted in the prices of these items go up significantly in the last few years. The increase in these item prices is captured by the WPI and the inflation index goes up. This is used by the organised sector employees to benefit themselves in a smart way. In their wages they have a component of dearness allowance (DA) which is linked to the WPI or other dependent indexes. Every time these go up or down as per agreed formulas between employees and managements the DA also goes up and down. Thus these employees, otherwise are not the real cause for the spurt in demand and are not going to increase their demands in the normal course start receiving more money which they utilise elsewhere.
However the rural and urban poor who also saw their incomes go up and are mainly responsible for the aggregate demand going up do not have any DA linked indexes to compensate them for the price rise, for which they are responsible to a large extent. Ultimately they find the going tough but have indirectly helped to boost the take home pays of the organised sector employees. It is grossly unfair to the poor and non organised sector self employed citizens.
In the Indian economy the contribution of the non organised sector is said to be nearly seventy to seventy five percent. Thus for every one employee in organised sector there are three in the non organised sector. They create their own enterprises, earn through their skills and are high risk takers as compared to the pampered public sector or private sector organised sector employee.
The benefits that are received by 25% organised sector employees are far high in proportion to that available to the poor non organised sector persons. They have to pay far more per cent of their earnings for availing say educational and medical benefits at private institutions which are primarily geared towards the organised sector employees who also have access to loans and insurance benefits. Both these are denied to the poor who in fact needs it the most. Thus the organised sector benefits from the high inflation and the associated price rise.
The poor get doles and subsidies which are also siphoned away by the in between organised sector and government employees as was admitted by the former PM Rajiv Gandhi when he said only 15 paise reach the poor for every rupee earmarked for them. The organised sector employees get annual raise in their salaries and DA increases.
This lopsided and unequal distribution is one of the main reason which is holding back India from attaining its real potential. It is time that the focus has to move away from pampering a vociferous minority of the society at the cost of the vast but tolerant majority. The political set up has to broaden its vision and concentrate on developing India's rural strengths and infra structure in a big way. Instead of trickle down approach it should be bottoms up growth model. In this way the roots become strong and the tree can bear more branches and give more fruits on a sustainable basis.
At the moment it seems to be somewhat like a cannibalistic model where the haves are taking away almost everything at the expense of the have nots. When will they also join the haves and make the country more prosperous is the key question to be asked in governance today. It is election time now. We hear major parties only debate 1984 vs 2002 riots, secularism vs communalism issues and not on how they will eradicate social differences or create more jobs or improve infrastructure like issues.
How long the welfare of a few will decide the development agenda? How long the vast majority continue to toil with no relief in sight ? How long will the system create under employment instead of appropriate employment opportunities?
it is time these and similar issues are addressed by our rulers to lift India much faster than at present to her rightful place in the committee of nations where every citizen is a proud Indian.
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