Our Battle Of Inflation, Unemployment and Inequality

Context: An account of worsening unemployment, inequality and inflation situation in India and prospective policy responses.

Economic issues in India:

• Falling labour force participation rate: Fallen for three consecutive months, and was barely 40% in April and unemployment rate went up to 8%.
• Fall in income and rising poverty ratio: State of Working India 2021 by Azim Premji University cited 230 million individuals have fallen below the threshold of the daily income of Rs.375, and the poverty ratio went up by 15% in rural areas and 20% in urban areas during March to October 2020.
• Rising inequality: With stock market bestowing increasing wealth and capital gains due to a liquidity-driven rally, in sync with global stock markets, amid anticipation of global fiscal stimuli.
• A shrinking economy: Growth in the index of industrial production over a two-year span has been negative, which means that economy is yet to recover to its pre-pandemic levels.
• Inflation woes: Wholesale price index (WPI)-based inflation for April reached above 10%, of this, fuel sub-component was at 20%.
  • Spill-overs from global uptrend: Globally, steel at $1,000 per tonne crossed once ‘insurmountable’ peak price of 2008, Bloomberg commodity spot index hit the highest level since 2011.
  • Vaccine optimism and strong growth prospects in the US and China: China grew at 18% in the first quarter of 2021, US’s is already a heating economy (with inflation at 4.2%).
  • World trade is picking up: As evidenced by a shortage of containers and soaring freight rates.
  • Rising prices of agricultural basket: Food and Agricultural Organization’s food price index risen by 31% in one year, sugar prices risen 58%, and vegetable oils doubled.
  • Upward pressure on CPI in India: In light of spillovers from WPI trend and rising fuel costs.
  • Paradox of good monsoon: A good monsoon could result in a bumper crop, possibly arrests food inflation but spells disaster for the farmers and rural producers.
  • Inefficient Minimum Support Price mechanism: Which is unable to offer farmers relief beyond those of cereals like wheat and rice.

Way forward

• Bring in a second round of loan-repayment moratorium and restructuring of overdue loans.
• Direct fiscal support to hard-hit households: As Working India report suggests, cash injections of Rs.5,000 per month to all Public Distribution System (PDS) households for at least three months.
  • Advantage of PDS model: PDS’s coverage is twice that of no-frill Jan Dhan bank accounts.
• Continuing grain provision: Extension of higher grain provisions for food security.
• Immediate priorities: Address health crisis while ensuring income and livelihood crisis doesn’t become a food crisis.
• Tackling fiscal challenges: Raise fiscal resources from present and future generations.