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Why inflation numbers do not make sense for India's poor

Regulating inflation is an unfinished agenda in the country. It is a battle between RBI and the Central Government. RBI attempts to manage the money supply through the banking system and it has its own limitations. RBI’s interest rate regulation and cash reserve ratio management proved less effective in controlling price rise of essential commodities. Such macro level inflation regulation measures do not regulate the grass root level price.

 Why inflation numbers do not make sense for Indias poor

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It is a fact that no finance minister is daring to take the responsibility of price reduction through fiscal measures. It includes increasing the supply of essential commodities and controlling market price rather than money supply. It does not seem to be the priority of government, which is neglecting the potential of such fiscal (government) policy measures in controlling prices. Such negligence gradually undermines the larger social implications of higher price rice.

Inflation rate has to be assessed vis a vis the government assessment of poverty based on calorie intake of food. As per the Rangarajan committee report about 30.9 percent of the rural population and 26.4 percent of the urban population were below the poverty line in 2011-12. So, in total 363 million people are below the poverty line as per the Rangarajan committee report. The Committee arrived at the decision by taking the monthly per capita consumption expenditure of Rs 972 in rural areas and Rs 1,407 in urban areas for a family of five. Now World Bank came up with another set of poverty estimation, according to which only 12.4 percent of India's population was poor in 2011-12. It considers an expenditure cutoff of $1.9 a person a day in purchasing power parity (PPP) terms.

World Bank’s data questions the Rangarajan Committee’s measurement of poor, i.e. half of the ‘poor’ identified by the Rangarajan Committee are ‘not poor’. However, if we compare these two figures with the general inflation trend in the country, it would give another ‘figure of poor’ in the country. Increasing price of food materials reduce the rate of consumption of informal sector and huge labour class. Those who work on a daily basis and earn minimum income are suffering from the food inflation.

So it is obvious that the number of poor also keeps shifting, especially in the case of people in the informal sectors and also seasonal change in income. Better income does not ensure that a family is above the poverty line. Higher inflation of essential commodities infact pushes the number of poor people below povery line. The matter of fact is that the food price inflation ‘increases the number of ‘poor’ i.e. adding more people who are unable to cope up with rising food price and force to reduce the consumption.

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It reduces the calorie intake as well i.e the real income (quantity of materials) of the informal sector workers are declining at a higher rate. It may not affect the people engaged in the formal and organized sectors. If we take the last five month prices of rice alone, it would provide a detailed account of the issue. If we take the last month CPI of essential food items it justifies this argument. The consumers include the people who cannot afford the higher price.

The higher rate of food price referred in the figure needs to analyse with the purchasing power of the society. The purchasing power of the majority is decreasing, and hence the inflation further reduces the consumption. Those Indian’s whose real income decrease due to inflation is becoming poor. However, there is no possibility that these sections of the population get listed in the list of ‘official poor’.

So technically the number of poor increases by every rise in the price of essential commodities in the country. It necessitates complete revisit of existing approaches to poverty assessment and inflation regulation in the country. Such an assessment should look at the individual level impact of price rise of essential commodities and the ability to afford such price rise.

The writer is a PhD, and assistant professor with Jamsetji Tata School of Disaster Studies

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Updated Date: Jun 18, 2016 11:24:44 IST