Directions : Read the passage and answer the questions that follow.
Inflation for the last four months has been worryingly high — wholesale price index (WPI) has been
above 10% and consumer price index (CPI) crossed the 6% mark in June, which was above the
Reserve Bank of India (RBI)‘s tolerance band. This is happening at a time when demand has been
down, unemployment has been high, many have lost incomes and poverty has aggravated. So, why
is there high inflation and does the official data capture the real picture?
In April and May 2020, data on production and prices could not be collected due to the strict
lockdown. Unlock had gradually started in June and July 2020 but normalcy had not returned. So,
the current data on prices for April to July 2021 are not comparable with the same months of 2020.
As such, the official inflation figures for these months in 2021 do not reflect the true picture.
Anyway, a single number for inflation is an aggregate across different commodities and services —
the price rise differs for different items of consumption. So, the single number is arrived at by
assigning weights to different commodities and services. For WPI, the weights in production are
used; for CPI, the consumption basket is used. But people are not homogenous. The consumption
basket is vastly different for the poor, the middle classes, and the rich. Hence, the CPI is different
for each of these classes and a composite index requires averaging the baskets. So, in a sense, it
represents none of the categories.
During lockdown and unlock in 2020, people largely consumed essentials. RBI data show that
consumer confidence fell drastically from 105 in January 2020 to 55.5 by January 2021. That
means, even when the economy started to grow officially, consumer confidence had not recovered.
There occurred a long hiatus for its recovery. Employment and incomes were still down and
according to one report, 230 million slipped below the poverty line.
All this implies that the
consumption basket for different sections of the population had changed. While the consumption
pattern of the well-off sections may have changed little, the poor and middle classes, especially
those who lost jobs and incomes, would have had to cut back on their consumption. Thus, the
weights in the CPI would have changed and inflation required recalculation, but this has not been
done. Consumer confidence was down to 48.6 in July 2021 due to the impact of the second wave of
COVID-19.
In India, 94% work in the unorganised sector and mostly earn low incomes and have little savings.
By definition, they cannot bargain for higher incomes as prices rise, and get hit by inflation. Further,
due to lockdowns, the wages of many declined, both in the unorganised and organised sectors.
This has impacted their family budgets.
Consequently, demand has declined not only for non-essentials but even for essentials. In a
vicious cycle, this is slowing down economic recovery and employment generation. Further, this
impacts the government‘s revenues and tends to increase the budgetary deficit. This puts pressure
on the government to cut back budgetary expenditures, especially on the social sector. That
aggravates poverty and reduces demand further. Thus, inflation in times of low demand and
reduced incomes leads to a vicious cycle of slowing the economy and a growing crisis in the lives of
the poor and unemployed, most of whom belong to the unorganised sector and some to the
organised sector.
The government has increased taxation of energy to raise resources. Since energy is used for all
production, prices of all goods and services tend to rise and push up the rate of inflation. Further,
this is an indirect tax, it is regressive and impacts the poor disproportionately more. It also makes
the RBI‘s task of controlling inflation difficult.
In brief, the current official inflation rate does not correctly measure price rise since the lockdown
administered a shock to the economy. The method of calculating it needed modification. Many of
the non-rich have suffered a double blow due to loss of income and rise in prices. This is slowing
down the pickup in growth by curtailing demand.
Q104. Which of the following points to the fact that there was a variation in the consumption basket
for different sectors?
(i) The fall in consumer confidence, which was 105 in 2020 to 55.5 in 2021.
(ii) The booming of the employment sector and the increase in household income.
(iii) Data signalling a huge number of people slipping below the poverty line.
(iv) The variation in consumption of essentials during the lockdown in 2020 and that in 2021.