Editoral 1: What’s feeding inflation in India
Recent Context:
- As input prices and demand soften, goods inflation, globally, is falling. But in India, goods inflation is rising.
- With rise in demand for high-touch services still having some way to go, services inflation, globally, remains elevated. In India, services inflation is falling.
Rise in Urban demand: A cause of Inflation
- It all started back in late 2021 when consumer spending in rural areas weakened.
- Through 2022, inflation accelerated, the March heatwave took hold, and monsoon rains proved erratic, leading to a poor harvest and a battering of rural incomes.
- Over this time, urban demand improved. As lockdowns ended, urban jobs came back. Workers who had gone home during the pandemic period returned to the big urban centres.
- Every time a worker moved from rural to urban India, result in rise of wages. Higher incomes meant strong consumption. Against this backdrop, the rural demand weakness showed up all the more starkly
- In the last few months of 2022, winter farm sowing picked up. With more hands needed on the ground, agricultural wages rose.
- In fact, after adjusting for inflation, they crossed pre-pandemic levels. Higher incomes showed up in some rural indicators too, including consumer non-durables production, which rose quickly from October levels.
- By end-2022, the shift in labourers moving back to the cities was almost over, as was the growth stimulus powered by it. After that, indicators of urban demand, such as consumer durables production, began to weaken. To be fair, rural demand is still barely rising, while urban demand is slightly softening. Neither is dramatic. But it is clear that the tables are slowly turning.
Situation in Informal Sector:
- Informal sector, which employs about 80 per cent of India’s labour force, divided equally between agricultural and non-agricultural workers.
- Informal-sector firms have faced back-to-back economic shocks:
- First, the lockdowns and,
- second, the commodity price hike.
- It was found that small firms underperformed large firms through the pandemic, losing market share, becoming less profitable, and paying their staff less. Of the small firms, the informal ones were hardest hit.
- Over the past few months, coming out of the lockdowns and last year’s commodity price jump, the prospects for small firms have improved. The burden of high input costs has fallen, and the salaries of these firms’ staff are gradually rising. Informal sector incomes appear to be rising, again showing up in indicators such as improving the production of non-durable consumer goods.
Interlinkages between the rural and the informal sector:
- There are strong interlinkages between the rural and the informal sector – so, in one sense, we use the two terms almost interchangeably.
- First, about three-fourths of the country’s informal sector workers live in rural India.
- Second, much of what rural Indians consume is produced in the informal sector.
- But it is also important to note that a quarter of informal-sector workers live in urban India, where they are also seeing improvement in incomes.
How will the informal and rural sector demand trends for goods and services evolve?
- About 20 per cent of rural households are landed (own more than one hectare of land). Much of their income comes from cultivation.
- On the other hand, much of the income of the 80 per cent of households that are landless (owning less than one hectare of land) comes from wages.
- These wages are split between agricultural (roughly 40 per cent of households) and non-agricultural activity (the remaining 40 per cent of households).
- Till six months ago, each of these groups was doing poorly. Now
- It is observed that rural and informal sector consumption is skewed more towards goods rather than services, and there too, more towards consumer non-durables rather than consumer durables.
- And manufacturers are taking this opportunity to build back profit margins, after sharp losses last year. This explains why retail inflation hasn’t fallen as much as wholesale inflation and why the margins of manufacturers are rising faster than the margins of service providers.
- And most importantly, it explains why goods inflation is outpacing services inflation.
- The rise in the more goods-heavy demand from the rural and informal sectors is the key reason why overall goods demand is outpacing services demand.
Conclusion:
Current Situation between two nations:
- With the aim of breaking the current stalemate during the military offensive season in late spring, NATO is feverishly rearming Ukraine with modern tanks, aircraft, and long-range missiles.
- Russian paramilitaries are grinding away at Ukrainian defences. A refitted Russian army bolstered by new conscripts is preparing for the summer offensive. Its defence industry is in full production mode.
- Wars of attrition turn on the exhaustion of military means. Due to superior resources and staying power, some military incompetence notwithstanding, Russia will gain the upper hand.
- Last year, NATO said Russia will be defeated. Now it says Russia cannot be allowed to win.
- Ukraine’s tragedy may be its permanent division ; one part incorporated into Russia, the other drifting into EU and NATO, with a contested dividing line floating between de-facto practicality and de-jure hollowness.
A war for super power:
- This is no longer a war of overturning aggression. Rather it is a contest of will between Russia and the West, and a test of the credibility of US global power.
- As the recent speeches of President Putin to the Federal Assembly and President Biden in Kyiv show, Russia is digging in and America is doubling down.
- With neither side prepared for mutual accommodation, unless they first gain the upper hand on the battlefield, the crescendo from the tolling bells of escalation will continue to rise.
- Russian suspension of the New START Treaty takes this to a new level. With attacks on Nord Stream II and Engels Strategic Air Base in Russia, the US is pushing limits like never before.
- With Germany voice-less and France’s voice drowned out by the high-pitched war cries from those on the NATO frontline, the US is torn between protecting its interests as a global power and avoiding a millenarian confrontation with Russia, which is what some frontline states Poland and the Baltics want, including the dismantlement of “imperial” Russia.
- Conflicts apart from Ukraine, the global stage is set for advantage China.
- An US that is overcommitted in Europe is a boon for China just as it is a burden for Russia.
- Russia and China will oppose the US, more separately than together, having common interests but differentiated stakes in an evolving multipolar world.
- China is a rising and menacing threat but not to every country in the same way. Being less encumbered than the other big powers, its global ambitions have risen sharply.
Role of Indian diplomacy during the war
- During the past year, India’s diplomacy has truly come of age. In not accepting the Western framing of the Ukraine conflict, India took a calculated risk.
- India stood its ground and that ground raised India’s global stature. Its “extractive diplomacy” — securing pragmatic benefits in the economic, energy and defence sectors from the dying embers of US unipolarity, the contested birth of multipolarity and our traditional strong relations with Russia, set commendable standards of diplomatic success.
- Multipolarity was pursued in practice, not just advocated in theory. In doing so, the Modi government was ahead of the curve.
Conclusion:
- War is never the solution of conflict rather it should be solved through dialogues, meetings and internal efforts. India can play the role of global leader to mediate peace and tranquility between two nations.
- If this century belongs to us, and peace and not endless war is our destiny, then we should help in its re-building, as a matter of national self-interest and the common global good.