The downturn isn’t a leveller, it’s a discriminator

If the Indian economy were an airplane in mid-flight, it is facing the equivalent of a frightful turbulence. The rough patch has spooked some passengers more, in this case, India’s vast, toiling middle-class.

However, those at the bottom of the income ladder, disadvantaged groups, and ethnic, religious and other minorities, such as Muslims and migrants, could be worse off.

There is evidence that economic crisis have impacted educational inclusiveness in sub-Saharan Africa.  The global economic crisis: Setbacks to the Educational Agenda for the Minority in Sub-Saharan Africa

Research in the US has pointed to the higher impact of the downturn on the Blacks and Hispanics. The Economic Crisis Isn’t Colorblind

There is little if credible data on how high prices and slow wages tend to impact laggard social groups, such as Dalits and Muslims, in India.

Often, while slower growth results in the same set of conditions, disadvantaged groups suffer the most because their capacity to mitigate the conditions is lower.

Here’s how India’s economic flight went. Just as super-strong air currents rock an aircraft from side to side, slowing it down considerably, a fast-growing India ran into recession headwinds. Luckily, it recovered quickly enough.

The government pumped lots of money into the system, as was necessary to steady things, raising consumption levels — or normal buy-and-sell transactions — back to 8% annually between 2009-10 and 2011-12.

These routine emergency steps by a government piloting the economy through tough times, however, caused inflation to rise uncontrollably.

It created a classic textbook situation where too much money chases too few goods, heightening a demand-supply mismatch. High retail prices, of above 10%, have now become entrenched in food prices.

Costlier food has shaved off precious domestic savings, hurtling India’s households — Uttar Pradesh’s alone is nearly equal to that of entire Brazil – into a silent crisis.

The Reserve Bank fought back, raising interest rates, making less money available for borrowing and spending, which in turn slowed investments and growth.

Is India stuck in a rut? India’s annual Economic Survey has painted a “cautiously optimistic picture” of the economy during 2013-14, according to Sonal Varma, an economist with Japanese investment bank, Nomura Holdings. “The downturn is more or less over,” the survey has said, predicting growth to exceed 6%.

To shore up its finances, India has been raising domestic diesel and LPG prices steadily. Nothing fans inflation more than a fuel-price hike. Some analysts point to a “stagflation”, where growth stagnates, while inflation keeps rising.

When expenses go up, the first thing people notice is food prices, the single biggest slab of their monthly expenditure. A critical impact has been on household savings.

Indians traditionally save good amounts in bank deposits, a key driver of prosperity. Savings are now rapidly falling.

Financial savings accounted for 55% of total household savings during the 1990s. This share fell to 36% in 2011-12. The current shortfall is nearly by Rs 90,000 crore.

Worryingly, food inflation is rising due to higher cereals, such as wheat, rather than protein items, such as meat, as in previous years. This shift has affected the diets of low-income families more.

This time around, prices have been fuelled by a scarcity of grains in the open markets, ironically, because the government has been cornering large quantities from farmers for distribution to the poor.

The government has been offering higher and higher minimum support prices (MSPs) to farmers. Higher MSPs boost farm income and encourage farmers to grow more because they get a guaranteed price, but these have now emerged as a key inflation risk.

According to an RBI study, a 10% MSP hike raises short-term wholesale inflation by 1 percentage point.

In his official report, India’s chief economic advisor Raghuram G. Rajan has suggested looking beyond higher MSPs as farm incentives.

N.R. Bhanumurthy, an economist with the state-owned National Institute of Public Finance and Policy, sums it up aptly: “High (inflation) has become the new normal.”

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