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India is due for parliamentary elections at the end of the year. Holding them a bit sooner would have been a referendum on the Indo-U.S. nuclear deal, but now inflation is displacing the nuclear deal as the number one election issue. The Bharatiya Janata Party sees it as an issue to unseat the present government.
The government is working hard to control inflation, but has not succeeded. The next three months could determine the survivability of this government.
Inflation is a worldwide problem. There is no country that has not felt the impact of oil and food price increases. Oil is at US$120 a barrel and wheat and rice, the main staples in the world’s diet, have doubled in price in just seven months. Different countries have felt the impact differently, with food important in the third world and oil important in the West.
China, which imports US$1 trillion worth of general goods and services, has inflation of 8.7 percent. China imports a lot of oil and industrial input like minerals and metals, which have tripled in cost. But China is not losing sleep over it because its people do not express their displeasure. It is very unlike India, where every leader with independent views comes out of the woodwork during tough times and tries to become a savior of the people. Inflation has presented them a new opportunity.
The United States and Europe are seeing inflation like the rest of the world, induced by oil and food prices. With the added burden of the Iraq war, the United States faces 4 percent inflation, which makes it uncomfortable. A 2 percent figure is more desirable, as was the case in July, 2007. Still inflation is not catching the public’s attention. The U.S. government has successfully argued that it is due to outside factors, and that high food and oil prices are negated by lower housing costs.
They way inflation is calculated in each country is key to understanding its impact.
India calculates the wholesale price index, which is the main indicator of inflation. Although multiple consumer price indexes are calculated, their publication has not caught public attention. There is no homogeneous consumer price index in India; rather a mix of several indexes exists. There is an index for industrial workers, an index for urban non-manual labor, an index for agricultural labor followed by an index for rural labor.
It has been explained that the reason for having multiple indexes is that urban and rural living is very different hence one index will not cover the whole spectrum of society. For example, housing is a major cost for urban dwellers but is irrelevant for the rural population base.
The WPI is a composite of 435 items, which are weighted by different items to produce a composite. These items are divided into three subgroups and each subgroup is further divided. The main subgroups are: primary articles; fuel, power and light; and manufactured products. The primary subgroup has 98 items and is 22 percent of the overall weighted average. The fuel-power group, with 19 items, constitutes 14 percent, while the biggest and most complex is manufactured products, which has 318 items and comprises 64 percent of the overall average.
The above complexity prevents one item or group of items from dominating the increase or decrease in inflation calculations. If all three subgroups undergo an increase then inflation inches higher and becomes uncontrollable.
U.S. calculates its inflation, unlike India, based on consumer prices. The consumer price index is a composite of a multitude of everyday items. It is divided into eight groupings each with its own weighted averages. These subgroups are: food and beverages (15 percent), housing (42.5 percent), apparel (3.5 percent), transportation (17.2 percent), medical care (6.3 percent), recreation (5.5 percent), education and Communication (6 percent), other goods and services (4 percent).
As elsewhere, a price rise in any group does not dominate the inflation calculation. For example, the doubling of gas prices at the pump is compensated by lower housing prices and lower borrowing costs. Hence inflation as reported by the United States is low. It reflects today’s situation, but may not reflect that of people tied to high previous mortgages. Hence CPI calculations have faults too.
China is more mysterious in its inflation calculations than others. The items included, and weighted average of the items, are unknown. Inflation at 8.7 percent is high, for the same reasons as elsewhere. The political leadership in China is safe, however, as exports keep 100 million Chinese employed, which keeps them happy and no opposition politicians can fan the flames of discontent.
In theoretical terms, an economist will define inflation as “loss of constant purchasing power of the money.” Its causes, as listed by economists, are an increase of the money supply and excessive debt. From 1800 until about the 1930s inflation was next to nothing. It began in the United States when soldiers returning from World War II with money to spend bumped up prices. Records of rudimentary CPI began to be kept after the war. Now this technique is sophisticated, and economists and financial managers burn the midnight oil to calculate the figures and find the causes of changes.
If the CPI index increases by more than 2-3 percent it is cause for concern. Above 5 percent, it makes a government scramble to act. Above 7 percent the government becomes shaky and may fall. President Jimmy Carter did not get a second term because of rampant inflation in the late 1970s, though other reasons also played a role. A Congress Party government fell in India in 1998 due to double-digit inflation.
For these reasons, the current government in India is a bit wobbly. In the eight years from 1999 to February, 2008, inflation stayed at a modest 4 to 5 percent, tolerated as a necessary evil of progress. It began to rear its ugly head in the last six months, however, thanks to high oil prices, the tripling of international food prices and the high cost of other industrial products.
Unfortunately for the government of India, none of the steps it has taken in the last two months have yielded results. India has harvested a record wheat crop. Its finances are fairly well in order, but India cannot control outside factors. This also happens to be an election year, in which the people will decide the fate of the government based on what is happening to them now.
Today, Indians are better off than they were in 1950. But one rupee in 1950 is worth only four pennies today, with 5 percent inflation over 57 years. Wages have increased too, but not enough. To keep up with the rising population and to give the masses a better life, a huge increase in output has been created. To accomplish that an increase in money supply was needed. This resulted in a debt trap in 1991-92, but also substantial progress.
Debt is necessary, as long it can be managed. If other factors are well-managed, inflation stays under control. For example, Argentina, Brazil and Mexico in the late 1970s had about 150 percent inflation. To finance their economic activity, they borrowed heavily and got into a worse debt trap. Everybody, including the lenders, learned a lesson. This was repeated when the Asian Tiger economies got into trouble from 1997-1999. It would appear that past lessons were not learned.
Somehow China and India have done well and avoided hyperinflation.
In short, the Indian government is on a short leash. Either inflation will be tamed or the present government will be history in the upcoming elections. The new government will undertake steps to control inflation at the expense of economic growth. That again is not a well-liked prospect. They soon will have to move into a higher economic growth cycle, and inflation will be back. Then they will be dumped and the cycle will repeat itself.
There is no magic wand for growing economies to have a perfect balance of everything.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
