Editorial 1 : Doing well on well-being
Introduction: There is a dramatic decline in the incidence of poverty since 2011-12 (based on Household Consumption Expenditure Survey 2022-23). But the discussion should go beyond the poverty and should focus on households’ vulnerability to adverse shocks. A household’s ability to cope with adverse shocks is essential to well-being and is a critical welfare measure but quantifying this remains a challenge.
Medical Expenditure: Shock to households
- Health shocks deprive individuals of their freedom and the associated sizeable medical expenditure also imposes an economic burden on family members as precious resources get diverted from other expenditure items to those needed for providing medical care.
Quantifying the data: Objective
- To highlight that the households that have incurred high medical spending due to hospitalisation might not have enough resources for other items, such as food or durable goods, and therefore are vulnerable to lowering their consumption status.
The bottom 50% population
- In bottom 50% population, the proportion of households that incurred hospitalisation expenditure increased from 17% in 2011-12 to 22% in 2022-23.
- This includes an increase from 18% to 23% for rural households and from 16% to 20% for urban households.
- This reflects a significant improvement in accessibility to healthcare for the poorest 50% population across rural and urban areas of India.
Ratio of health expenditure to overall household expenditure
- For the bottom 50% of the households, their health expenditure without any hospitalisation was 3.3% of their monthly household expenditure in 2011-12 which increased marginally to 3.6% in 10 years.
- But the households that experienced hospitalisation have witnessed a significant decline in the share of their health expenditure as a ratio of their monthly household expenditure from 10.8% to 9.4% in 10 years.
- In rural areas, for the bottom 50%, the ratio of health expenditure of households without hospitalisation increased marginally from 3.4% to 3.6% over 11 years.
- During the same period for households that experienced hospitalisation, this ratio declined significantly from 11.15% to 9.14%.
- This shows that healthcare involving significant hospitalisation expenditure is becoming more affordable for the poorest half of the Indian population, especially in rural areas.
Change in consumption status of households due to health expenditure
- Among the poorest half of the population, 40% of those who experienced hospitalisation faced a decline in their consumption status in 2011-12.
- However, by 2022-23, despite the rising incidence of hospitalisation, only 33% of these households faced a decrease in their consumption status.
Conclusion: Overall, in the last decade, healthcare has become more accessible and affordable to the bottom 50% of the Indian population. There is a significant decline in the odds of households facing a loss in overall consumption status due to the financial burden associated with hospitalisation. Results are more pronounced for rural households. The trend is closely associated with the Ayushman Bharat Yojana.
Editorial 2 : Reading the inflation tea leaves
Context: RBI’s MPC has left the policy rate and stance unchanged in Aug 2024
Introduction: RBI has highlighted concerns around high food inflation, while core inflation (excluding food and fuel) remains muted. Food inflation cannot be ignored as it has a strong bearing on household inflationary expectations, which in turn can feed into actual inflation. This is what makes RBI’s future policy uncertain and complex.
Current status of inflation
- CPI inflation has been hovering around 5% for the last six months, higher than RBI’s target of 4%.
- This is mainly because of spikes in prices of food items, which has a high weight of 46% in the CPI basket.
- High inflation in cereals (8.8%), pulses (16%) and vegetables (29%) have been keeping food inflation elevated at around 8%.
- So far, the high food inflation has not become broad-based and core inflation has been below RBI’s target of 4% for the last six months.
Economic survey suggestion
- The latest Economic Survey suggested that the MPC should consider targeting CPI inflation excluding food prices.
Challenges in inflation targeting
- The share of food and beverage in India’s CPI basket is much higher than developed countries (15% in the US and 20% in the EU) or even emerging economies like Brazil, China and South Africa (weight ranges between 20-25%).
- It is relatively easier for developed countries to have an inflation-targeting monetary policy given the low share of food in the inflation basket, but it is challenging for India.
- Food prices are volatile and influenced by weather conditions, making it challenging to have monetary policy targeted around CPI inflation (including food).
- Monetary policy generally affects demand-side factors and is somewhat ineffective in controlling supply-driven food inflation.
What needs to be done?
- RBI needs to take a holistic approach to CPI inflation targeting.
- While the focus on supply-induced and demand-side inflation should continue, it is critical to assess the likely nature of supply-induced inflation.
- It is important to critically assess components of food inflation like vegetable prices that could be transitory.
- CPI inflation excluding vegetable prices is currently around 3.7% and it has been below RBI’s 4% target for the last five months.
Other dimensions and concerns
- High-frequency indicators like IIP, auto sales, GST collection, PMI-Manufacturing and Services continue to remain healthy.
- Concern remains around consumption demand and relatively muted recovery in private investment.
- Rural demand is showing signs of improvement as reflected by the FMCG sales.
- A healthy monsoon and the consequent moderation in food inflation should somewhat aid consumption recovery.
- With a rise in capacity utilisation, private investment is likely to pick up, though at a moderate pace.
Global factors
- There is increased geo-political turmoil even while growth concerns linger over global economy.
- There is monetary policy divergence, with central banks in the EU, Canada, Sweden, Brazil and China initiating a cutting cycle even while their counterparts in Japan and Indonesia have hiked policy interest rates.
- US Federal Reserve is expected to start cutting rates from September.
- Indian economy is relatively well poised on the external sector front, with expectations of a comfortable current account deficit and healthy capital inflows in FY25.
- High forex reserves of $675 billion are a big source of comfort, nevertheless, we need to remain cautious amid the global turmoil.
Credit-deposit gap
- RBI has highlighted the issue of bank deposit growth trailing credit growth and the liquidity risk that it poses for the sector.
- With bank credit growing at 14% (excluding merger impact) and muted deposit growth of 11%, the credit deposit ratio has risen to 77.4 in July.
- This is due to the diversion of household savings into other asset classes like equity, which have been offering higher returns.
Going Forward
- RBI will continue to watch trends in inflation. The direction of food inflation would have a strong bearing on RBI’s future policy decisions.
- With domestic core inflation remaining muted, RBI could go for a shallow rate cut towards the end of the calendar year, provided food inflation shows signs of moderation.