September 21, 2014

Understanding Inflation

Prabhat Patnaik

RULING class offensives against the labouring poor in conditions of economic crisis are typically sought to be justified by advancing theories that attribute the crisis to the labouring poor themselves. A theoretical exercise to justify an attack on the labouring poor is on at present, with regard to the inflation that has been raging in the country.

The main bourgeois theoretical argument on inflation states that it is due to the large fiscal deficit which the government has been running; and this in turn is attributed to the “profligacy” of the government in operating a whole range of “populist schemes”, of which the MGNREGA is the most prominent. To control inflation and bring the fiscal situation “back on track”, the argument states, it is important to prune such “populism”, which means inter alia curtailing the scope of the MGNREGA.

Now there are two obvious problems with this argument: first, even if we accept the premise of this argument that the current inflation is due to the fiscal deficit, the fact remains that the expenditure on the MGNREGA is less than 0.3 percent of the Gross Domestic Product; and even if we add all other so-called “populist schemes” the total spending is unlikely to exceed 0.5 percent of the GDP which is way below what  successive budgets of the UPA government have made available as “transfers”, in the form of tax concessions, to the capitalists, to boost their “animal spirits” (to use Keynes’ term), so that they could undertake larger investment and thereby revive growth. And yet at the end of it all, as Manmohan Singh himself admitted before leaving office, the capitalists’ “animal spirits” had not been revived! Therefore, if a cause has to be found for the burgeoning fiscal deficit, then it must be the government’s largesse to the capitalists rather than its spending on “populist schemes”.

Secondly, however, the premise of the argument itself is wrong. A fiscal deficit can cause inflation only by adding to the level of aggregate demand. Therefore if a fiscal deficit were the cause of inflation then that inflation should be an “excess demand” inflation, i.e., one where the availability of goods at the base prices is insufficient to satisfy the level of demand at these prices. But in India we are experiencing inflation even though there is huge unutilised industrial capacity, large unsold foodgrain stocks with the government (so much so that the government has actually exported 40 million tones of foodgrains over the last two years), and a GDP growth rate that has been slowing down because of the lack of demand, with the manufacturing sector even facing absolute stagnation. Hence this entire explanation, of inflation being caused by a burgeoning fiscal deficit, simply cannot stand scrutiny.




It is in this context that an alternative official explanation has started doing the rounds. This explanation accepts what has been obvious to any impartial observer for long, namely that the current Indian inflation is of the “cost-push” rather than of the “demand-pull” variety, i.e., it has arisen not because of excessive demand but because of an autonomous rise in costs. But it attributes this rise to the fact that both money and real wages in rural India have increased owing to the MGNREGA.

The Commission on Agricultural Costs and Prices claims that the condition of agricultural workers has improved noticeably in the years of liberalisation, that while in the period 1990-91 to 2000-01 the trend growth rate of the real wage of agricultural workers was 3.7 percent per annum, the trend growth rate between 2001-02 and 2011-12 was a little lower, but still positive, at 2.1 percent per annum. Within this latter period, however, the real wages actually fell (at -1.8 percent per annum) between 2001-2 and 2006-7; but they increased at a remarkably high rate, of 6.8 percent per annum, between 2007-8 and 2011-12. Taking the entire period 1990-91 to 2011-12 the trend growth rate was 2.9 percent per annum.

On the basis of this perception about real wage growth, especially in the recent years, which is not exclusive to the CACP but is more or less shared by all government organisations, it is suggested that this growth, towards which the MGNREGA is believed to have been a contributory factor, is responsible for the food price inflation that is occurring in the country. With high wage growth, it is argued, the costs of production in agriculture have gone up, and to compensate the producers for this increase, the procurement prices have had to be revised upwards. Since the open market prices move in sympathy with the procurement prices, they too have moved up. The conclusion is then drawn that the scope of the MGNREGA should somehow be restricted if this inflationary tendency has to be arrested.

This perception about an improvement in their real wages thus constitutes the theoretical basis for an escalation of the neo-liberal attack on the agricultural labourers in the current conjuncture. But has there been such an increase in their real wages? Even if we leave aside all problems relating to the quality of the wage data, there are two obvious lacunae in the above argument. First, whether we talk of the wage costs incurred by the “farmers”, or of the living condition of the agricultural workers, what is relevant is not the wage rate but the total earnings, i.e., the wage rate multiplied by the number of days worked, and in the absence of data on the number of days worked, nothing can be said  about the condition of the  workers or about the costs to the producers.

The second problem is that the real wage rate of the agricultural labourers is calculated by deflating their nominal wage rate by the Consumer Price Index of Agricultural Labourers (CPIAL). This price index however is utterly inadequate. It does not for instance capture the effect of one of the most obvious phenomena that have occurred over the period of “liberalisation”, namely the privatisation of important services like education and health which have raised the cost of these services to everyone, including the labouring poor.

To see how privatisation makes a difference to the consumer price index, let us take a simple example. Let us imagine that in the initial year, every agricultural labourer went to a government hospital, while in the current year, because government hospitals have been run down in the intervening years, everyone is forced to go a private hospital. If all prices, including government hospital charges remain unchanged between the initial and the current year, then the CPIAL would show zero inflation. But because the agricultural labourers are forced to go to private hospitals which have much higher charges, the fact that government hospital charges have remained unchanged makes little difference to them. Indeed if health expenditure accounted for 30 percent of a labourer’s total expenditure in the base year, and if the charges of the private hospital are double those of the government hospital, then in this particular example the actual rate of inflation which the agricultural labourers face is 15 percent and not zero as the CPIAL would suggest. The CPIAL, by not taking into account the effect of the massive privatisation of services, thus seriously underestimates the rate of inflation and hence seriously overestimates the magnitude of the real wage increase.

It is significant in this context that the ILO has estimated the real wages for all workers in India to have declined at the rate of 1 percent per annum during roughly the same period, 2008-12; and in such a case the agricultural workers could scarcely have seen an improvement in their real wages. If nothing else, their sheer numerical weight in the labour force is such that a decline of this order in the wages of all workers cannot coincide with any noticeable increase in the real wages of agricultural labourers.




There is actually a simple way to get out of this entire statistical imbroglio. And that is to take the daily calorie intake of the agricultural labourers, which is a far more pertinent indicator of their well-being and which, international experience (both cross-country and over time) shows, invariably increases whenever there is an improvement in the level of well-being. In fact the “poverty line” in India is defined precisely on the basis of the per capita daily calorie intake.

We do not have calorie intake figures separately for agricultural labourers per se but if we take the total rural population then we find that the proportion accessing less than 2400 calories per person per day (which was the original “poverty norm” accepted for rural India) was 72 percent in 1973-74 and fell to 70 in 1983. Since then it has gone up to 74.5 in 1993-94, 87 in 2004-05 and 90.5 in 2009-10.

Even if we take a lower “norm”, of 2200 calories, which is the one that is actually taken for defining the poverty-line, the respective figures for the same years are: 56.4, 56, 58.5, 69.5, and 75.5. And there is no indication of any decline even after 2009-10, i.e., even if we take 2011-12 as our terminal year.

Since agricultural labourers constitute the core of the rural poor, it follows from these figures that far from there being an improvement in their condition, there must have been a significant deterioration. An autonomous wage-push, made possible by the introduction of the MGNREGS, cannot therefore be held responsible for the inflation occurring in food prices at present. On the contrary, the agricultural labourers have not been adequately compensated for the autonomous cost- of- living-push that they have faced of late.

This autonomous cost-of-living push has been caused inter alia by the massive drive to privatise essential services which has occurred in the period of liberalisation. This has affected the entire population, including the agricultural labourers. The current inflation is rooted therefore not in the provision of succour to the rural poor through schemes like the MGNREGA but in the pursuit of privatisation under neo-liberalism, against which even this succour to the rural poor has been grossly inadequate.

The transition from a dirigiste to a neo-liberal regime is invariably associated with such a rise in the cost of living, since a whole range of subsidies and transfers that came to the working people earlier get curtailed, even as essential services get privatised. This cost-of-living increase is at the root of the current inflation, and money wage increases which are a response to it are not even adequate to defend the standard of living of the workers. Such inflation eventually comes to an end because money wage increases keep falling behind price increases. The government explanations of the current inflation are meant precisely to create conditions for hastening this end, by curtailing money wage increases of agricultural labourers.