High inflation in times of Covid-19 will hit us hard

Last Updated 21 November 2020, 19:14 IST

In October 2020, inflation, as measured by the consumer price index (CPI), stood at 7.61%. This is the highest inflation level since March 2014, when it was at 7.63%. Let’s look at this issue in all its dimensions.

1) A major reason for high inflation has been high food inflation, which was at 11.07% in October. Food forms around 39% of the weight of the CPI. Within food, prices of egg, fish and meat, oils and fats, vegetables, pulses and spices, went up by more than 10%. Interestingly, potato prices have risen 104.56% higher since last October. This is the highest inflation among all the items that are a part of the CPI. One reason offered for this is a disruption in supply chains. But the economy has now more or less fully opened up, meaning disruption can’t continue to be a valid reason. Interestingly, food inflation has been on the higher side since October last year, much before Covid-19 broke out.

2) The high inflation is not just because of high food inflation. If we look at core inflation, which leaves out food items and fuel and light items, the inflation is at 5.64%, the highest in 30 months. A major reason for this has been an increase in transport costs, which went up by 11.16% in October. Fares of buses, taxies, autorickshaws and rickshaws have gone up. And the reason for that is that petrol and diesel are now more expensive, primarily because of the government increasing excise duty on them. This, despite the fact that oil prices have fallen internationally. The government’s dependence on fuel taxes has only gone up this year and that is reflecting in higher inflation. Petrol and diesel used for vehicles come under the transport and communication category of the CPI, and not the fuel category.

3) Another reason for high core inflation is the higher inflation in the paan, intoxicants and tobacco segment. Interestingly, foreign liquor and beer cost 22.32% and 25.32% more this year than last year. This reflects the state governments’ increasing the tax on these products to shore up revenues. Toddy prices have also risen 20.19%. Also, the personal care and effects segment saw inflation of 12.07% in October. The cost of going to a barber/beautician went up by 7.04%. But the major increase here has been in the prices of gold, silver and other ornaments, which went up by 33.77%, 36.66% and 20.52%, respectively. For some reason, they are categorised under personal care and effects.

4) While inflation in the health category has been lower this year than the last year, in October it went up by 5.22%, the highest it has been this year.

5) Within the fuel category, the price of domestic cooking gas went up by 10.16% in October, while non-PDS kerosene was up 8.28%.

6) The high inflation is primarily in the areas of food, parts of fuel, communication and, to some extent, health. These are areas that impact the common man. How do higher prices of gold, silver and other ornaments impact the common man? They play a very important role in Indian weddings. All in all, high inflation has hit India at a time when the country has just gone through its first-ever recession since Independence. The Indian economy contracted by 23.9% during April to June. It is expected to contract between July and September as well.

In fact, as Nikhil Gupta and Yaswi Agarwal of Motilal Oswal point out in a recent research note: “The rise in the core inflation in India is also the highest among the 21 major economies in the world.” This is very worrying.

7) High inflation has hit us at a time when an economic contraction has led to a fall in incomes. Over and above this, people are also saving more, to be ready for a rainy day. The total amount of bank savings increased by Rs 6.32 lakh crore between March 27 and October 23. Last year, during a similar period, the deposits had gone up by Rs 3.29 lakh crore. The psychology of a recession is fully in place.

What does this mean? A good segment of the population has been cutting down on consumption, particularly non-essential consumption, thanks to lower incomes. A high rate of inflation, if it prevails, will only add to that, making the job of the government and the Reserve Bank of India (RBI), even more difficult.

8) While deposits with banks have soared, the total amount of credit given by banks has actually contracted by a little over Rs 32,000 crore between March 27 and October 23. On the whole, in effect, banks haven’t given a single rupee of a new loan since Covid-19 struck. This has led to the RBI cutting the repo rate, the rate at which it lends to banks. Along with this, the central bank has printed and pumped a lot of money into the financial system, in the hope of driving down interest rates, in order to get both companies and individuals to borrow and spend more money.

That clearly hasn’t happened because of the lack of certainty of economic future. But all the money flooding around in the financial system has led to lower deposit rates, making the lives of senior citizens difficult, who have no option but to cut down on their consumption. Even those who use fixed deposits to save for the future are caught up in a jam.

In this environment, if inflation continues to remain stubbornly high, as it has through much of this year, neither will the government be able to get consumption going, nor will the RBI be able to continue cutting the interest rate.

(Published 21 November 2020, 19:04 IST)

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