THE MIRAGE OF LOW INFLATION
Even as reported CPI and WPI figures are coming down and the reported inflation is collapsing the key thing to analyze is whether you and me are actually feeling the impact of low inflation or is this just a mirage reflected in reported figures and the actual picture is something else. The fact is that actual inflation in India is much, much higher than what these figures reflect.
In order to make my point I recently analyzed the construction cost of a new house. My friend is constructing his house in Chandigarh. I had done a similar construction for my parents 5 years back. The facts of the inflation in house construction 2009 Vs 2014 lie as follows
Cost of Labour per day Rs 250 Vs Rs 600
Cost of Sand per truck Rs 10000 Vs Rs 400 (whopping increase due to mining ban, everything in the hands of the sand mafia now who are minting money)
Cost of Bajri per truck Rs 10000 Vs Rs 1500 (whopping due to ban on crushers etc so again mafia at work)
Cost of Bricks per brick Rs 6.75 Vs Rs 3
On the other hand the cost of the material which finds a place in the Wholesale Price index i.e Cement and Steel is up by hardly 25% over a period of five years. What the above mentioned figures actually reflect is the fact that the cost of construction is significantly higher than what the official figures would reflect. After taking into all of the above the cost of constructing the house of a similar size is in the region of Rs 1 Crores as against Rs 40 lakhs that I spent in 2009, i.e. the inflation is actually 150% over a 5 year period.
The above example was just one to show that the actual inflation is much higher than what figures reflect. Now if we come to the day to day living of people, although the price of petrol and diesel have come down and are likely to come down further for the common public who use public transport in the form of buses or railways or use taxis or autos the prices continue to move up. Railways did not increase ticket prices for years and as such the adjustment towards higher ticket costs is likely to continue. Taxi and Auto fares have been rising in double digits and the cost of Bus Travel has behaved similarly.
In terms of power i.e. electricity costs for consumers the story is similar. Most distribution companies have failed to cut losses despite huge investments. They continue to make losses and burden the public with higher electricity tarrifs every year. The last two years have seen an average increase of nearly 20% and despite lower fuel costs we are unlikely to see lower costs for us anytime soon. Infact on an all India basis a double digit increase is expected next year too.
Food price inflation to a great extent tends to be better captured in official statistics. There has been no movement on the supply side on the Agriculture front. No new investments seem to be coming up to reduce pre and post harvest losses, storage etc. The low inflation figures that we see today are just due to the base impact where prices were very high last year. Food prices are prone to supply shocks and the per capita consumption of products like milk, eggs, pulses and vegetables is only likely to grow in India. Fruit price continue to be high and the inflation in these is in double digits. It is not that nothing good is happening in agriculture. Basmati rice and Cotton are big success stories. However much more needs to be done.
The biggest inflation is seen on the services side. Besides transportation the cost of every service has increased at a pace much higher than the reported CPI. You need to yourself see the increase cost that you have to pay for a haircut, healthcare, various public services or to hire a cook or a driver. Do we actually believe that the cost increase in these is near the current CPI of around 5.5% or the average CPI over the last 5 years of 9-10%. The fact is that even 10% is an underestimation of the cost increase of all of these.
All this is not to say that inflation has been muted in a lot of manufactured products. However these products do not form a part of day to day living of the general public. Prices in India tend to go up faster, however are very sticky on the way down. Even when wholesale prices crack retail prices are sticky. The fight against inflation still has a long way to go.