Inflation in India, as measured by the Consumer Price Index has been accelerating in the current financial year. While the inflation rate in March 2016 compared to March 2015 was 4.83 percent (which itself was a significant rate), it increased to 5.47 percent, 5.76 percent, and 5.77 percent respectively in the subsequent three months, and to 6.07 percent in July, the highest rate for any month (over the corresponding month in the previous year) since August 2014.

This surge in inflation is led by “food and beverages” for which the year-on-year rate in July was 7.96 percent; for “food” alone it was 8.35 percent. And within the “food” group the increases were most pronounced for pulses (27.53 percent), sugar (21.91 percent) and vegetables (14.06 percent). The outgoing RBI Governor Raghuram Rajan has suggested that the July surge is just a passing phenomenon, and that the inflation rate would decline in the coming months. But no significant fall in this rate seems likely in the coming months for a number of reasons: first, the world oil prices are on an upswing again, and this would impart a boost to inflation in India; second, sugar prices in India which have moved in tandem with world sugar prices are likely to continue at a high level for quite some time and even increase further (which means that the year-on-year rate of inflation will also continue to be high for quite some time); and third, the prices of pulses are also likely to remain high (even if arhar prices get stabilised in the coming months, the prices of chana or chick peas are likely to increase even further), so that once again the year-on-year inflation rate for pulses will continue to remain high in the coming months.

But even more significant than the current surge in prices is the fact that in the last three years (ever since the new price-index came into being), barring just two months, the year-on-year inflation has been in excess of 4 percent in every single month. How can this fact be explained when the material commodity-producing sectors in the economy have been virtually stagnant, when employment (if we ignore job-sharing) has scarcely increased at all, when there has been a systematic compression of the incomes of the working people imposed inter alia through a fiscal policy that combines tax concessions to the rich with a restriction of the fiscal deficit, and when monetary policy under Rajan’s charge has generally kept up the interest rates despite much criticism?

Nature of inflation
To answer this question, let us first examine briefly the nature of the inflation process. A rise in prices of commodities has a certain self-sustaining character. This is because commodities are used either as current inputs into the production of other commodities, or as wage-goods of the workers who produce other commodities and demand to be compensated against a rise in wage-goods prices. In both these ways a rise in commodity prices raises the unit (prime) costs of production of commodities, and given the fact that prices themselves are fixed as a “mark-up” over these unit (prime) costs, any inflation feeds upon itself. And this happens even when there is no excess demand for any commodity.

Of course, the workers do not get compensated for a rise in the price of wage-goods immediately. There is usually a long time-lag before they get money wage increases, if at all they do, to compensate them for the price-rise. In the interim they suffer a fall in real wages; and the longer the time-lag after which they get compensated for inflation, the lower on average is the rate of inflation and the lower on average is their real wage rate. The typical manner in which capitalism seeks to curb inflation therefore is by lengthening the period over which workers remain uncompensated for the price-rise, and hence by lowering the average real wage.
This may sound paradoxical: the whole purpose of controlling inflation is supposed to be to prevent a decline in real wages; but capitalism actually controls inflation by enforcing a decline in the average real wages. But, for any given time-lag over which the workers remain uncompensated for a rise in prices, there is a certain rate at which, inflation, once it has begun, perpetuates itself. Let us call this the “base rate of inflation”. In the Indian economy today this “base rate of inflation”, which must prevail in the absence of any fresh and further attack on the workers to further lengthen the time-lag over which they remain uncompensated, and which occurs even when there is no excess demand for any commodity (ie, which occurs entirely because of “cost-push” reasons), is itself likely to be at least 4 percent per annum.

There are two additional factors operating on top of it, which raise the level of inflation above this base rate as a more or less permanent phenomenon (or one could alternatively also see it as a rise in this base rate itself). The fact that under the neo-liberal regime, despite demand compression through fiscal means and despite a restrictive monetary policy, whose conjoint effect is the simultaneous existence, alongside inflation, of unutilised industrial capacity and unsold stocks of foodgrains, we still find a more or less continuous presence of around 5-6 percent inflation, which may occasionally go up (because of excess demand pressures in some sectors) but rarely ever goes down, can be explained in terms of a rise in the base rate because of these two factors.

The first of these factors relates to the foodgrain economy. For quite some time now, the government has been holding stocks of foodgrains which are much larger than what is considered to be “normal” for meeting the requirements of the public distribution system and of buffer stock operations. On August 1, 2016 for instance there were 49 million tonnes of foodgrain stocks with the government (22.1 million tonnes of rice and 26.9 million tonnes of wheat); the corresponding figure for August 1, 2015 was 55.4 million tonnes consisting of 18.7 million tonnes of rice and 36.8 million tonnes of wheat. And yet despite such large foodgrain stocks at the end of July, there was an increase in the wholesale prices of both wheat and rice in the month of July by as much as 1 percent each over their levels in June. Government stocks of foodgrains in other words despite being ample have ceased to play any role in countering inflation in foodgrain prices.
The reason for this lies in the fact that the government under the neo-liberal regime almost never releases larger stocks through the PDS as a counter-inflationary measure. It never does so because any release of stocks through the PDS, because it will have to be at a lower price than what was paid for procuring the foodgrains, will raise food subsidy and hence the fiscal deficit which globalised finance dislikes. These very stocks if just held by the FCI entail at the most an interest cost but not the additional “burden” of selling at lower than the procurement price. Hence the fiscal “prudence” enforced upon the government by globalised finance capital in a neo-liberal regime has this bizarre consequence that holding idle stocks (or exporting them, which India has been doing on a large scale of late) is preferred to feeding the domestic population through the PDS, or combating domestic inflation by releasing stocks through the PDS. At the most, some stocks are released in the open market as an anti-inflationary measure, but these make little difference to inflation since speculators easily buy up these stocks, which they could not do if the stocks were released through the PDS.
In the pre-liberalisation days, the government had also released stocks in the open market as an anti-inflationary measure in 1971-72 which predictably had little effect in moderating inflation. After that the government had learned its lesson and had been more willing to enlarge the PDS in periods of inflation. With neo-liberalism however we are back to square one: what was rightly considered folly earlier is now paraded as wisdom. As a result the “base rate of inflation” in the economy has got raised.

Rachet effect
A second factor that has been at work is a “ratchet effect”. When prices rise, say of pulses, imports which are resorted to anyway, are increased. This increase occurs until the rise in prices comes to an end, but not to bring down the prices to the original level. Prices therefore remain stuck at the level to which they have risen, or close to it, but do not revert back to the original level. The next round of inflation occurs starting from the higher level which they had already reached during the previous round of inflation. This “ratchet effect”, in the sense that shortages push up prices but the overcoming of shortages does not push them down to the original level, increases the “base rate of inflation”. This “ratchet effect” operates particularly powerfully when imports are resorted to not by some independent government agency that is entrusted with the task of breaking the inflationary surge but by private traders who are themselves the beneficiaries of inflation.

It is for these reasons that we find that inflation persists despite tight monetary policy. It is obvious that high interest rates can have little impact on inflation. The assumption behind using the interest rate weapon against inflation is that it is caused by excess demand; a high interest rate is supposed to lower the level of aggregate demand in the economy and thereby check inflation. But when inflation occurs in the midst of “excessive” stocks, unutilised industrial capacity and a generally stagnant level of material production, it is not of the excess demand variety, and interest rate can do little to control it directly. It can at best have an indirect effect through lengthening the time-lag over which the workers remain uncompensated for inflation (because credit is not easily available to enlarge the money wage-bill), but this is both ineffectual and anti-people for reasons discussed earlier. The way to control cost-push inflation is by the government’s intervening in the market directly to keep profit-margins down, but this is not what a neo-liberal regime permits.