South Asia

Will India's rising inflation lead to social unrest?

A vendor sells vegetables at a market in Mumbai June 14, 2010
Image caption Prices of all food items have all gone up considerably

Earlier this week, India's opposition parties came together in a rare show of unity to take to the streets in cities across the country.

They protested against the government's recent decision to raise fuel prices after it scrapped its subsidy of petrol prices in an effort to cut the budget deficit.

Supporters of the right-wing Bharatiya Janata Party joined hands with their ideological rivals among the Communists to paralyse normal life in large parts of the country.

Opposition leaders thundered that the government was more concerned more about "the health of its oil companies than of its ordinary people."

Image caption The strike impacted life in large parts of India

The government's chief economic adviser Kaushik Basu said the revised prices of petroleum products would add less than 1% to the official wholesale price index.

But the government's critics argued that such a calculation did not take into account the "cascading effect" of an increase in transport expenses on account of higher diesel and petrol costs.

Even sections within the ruling Congress party were unhappy with the government's decision although Prime Minister Manmohan Singh justified the move.

"People are wise enough to understand that excessive populism should not be allowed to derail the progress our country is making," Mr Singh said.

"The subsidies on petroleum have reached a level which is not connected to sound financial management of our economy.

"So, this decision has been taken to put some burden on the common people, but it is manageable."

High inflation

India is not Zimbabwe. Nor has inflation touched triple-digits as it had in the past in countries such as Argentina, Brazil, Russia or Israel.

However, by the standards of most countries still struggling to get out of recession, inflation in India has been rather high at around 10-11% in recent months.

Image caption Inflation burdens the underprivileged

This has prompted the country's central bank, Reserve Bank of India, to increase interest rates by 0.25%.

Another interest rate increase is expected soon, which has far from enthused industry and trade.

Inflation, economists have argued for long, is akin to a tax on less well-off sections of society.

When inflation occurs largely because of rising prices of food products (as it has in India of late), it becomes a double burden on the underprivileged since food accounts for more than half the expenditures of the poor.

Over the last seven months, food inflation has ranged between 13% and 20%.

Prices of pulses, dairy products, sugar, edible oils, fruits, vegetables and cereals have all gone up considerably.

The government acknowledges that the bottom one-third of the country's 1bn-plus population lives below a contentiously-defined "poverty line".

India is currently mulling the enactment of a new law conferring the right to food to all its citizens.

Until the middle of 2008, inflation in India was driven largely by high prices of petroleum products.

The country imports over three-quarters of its total requirements of crude oil though it has surplus capacity to refine petroleum products (some of which is, paradoxically, exported).

Whereas kerosene and cooking gas are subsidised, the benefits often do not reach those the subsidies are meant for.

Shifting the burden

For instance, kerosene is under-priced because it is supposed to be used by the poor for cooking and lighting and also aimed at discouraging the use of wood for burning.

However, the fuel is illegally diverted to adulterate diesel and petrol because of price differentials and is smuggled out of the country.

India levies high taxes on petroleum products - half of the selling price of petrol and nearly a third of the price paid by consumers of diesel go towards various imposts levied by the federal and provincial governments.

Image caption Indian motorists have enjoyed cheaper fuel prices thanks to state subsidies

However, instead of paring taxes on petroleum products which contribute handsomely to the exchequer, the government has chosen to shift the burden on to consumers.

Inflation is a consequence of a combination of demand-pull and cost-push factors.

Over and above higher transportation costs and a poor monsoon in 2009 contributed to food shortages pushing prices up.

Despite comfortable stocks of wheat and rice, the distribution of cereals is inefficient; the problem is compounded by poor storage facilities.

India's farmers are vulnerable since 60% of the country's total cropped area is not irrigated and dependent on a four month-long monsoon during which period 80% of the year's total precipitation takes place.

Whereas the ongoing rainy season in India portends a favourable crop output, prices of farm produce may not fall immediately.

Prime Minister Singh has conceded that inflation would come down to 5-6% not before December, contradicting earlier official claims that a fall in the inflation rate was imminent.

The government is implementing a rural employment guarantee scheme that legally mandates 100 days of unskilled manual labour in a year at a minimum daily wage of 100 rupees (or just over $2) to every family demanding such work.

But high food prices have sharply eroded the real incomes of large sections of the population.

There is a cynical view that the since the political opposition to the ruling Congress party is in disarray, since the next elections are four years away and since sections of India's upper middle classes just do not care about the poor, the government will not succumb to pressures to "roll back" prices.

But the incumbent elite in Delhi may be sitting on a dormant volcano, if popular protests over rising food and fuel prices erupt the way they did this week.

The author is a leading analyst on the Indian economy

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