Higher inflation cost households Rs5.8 trillion over last three years
Moneylife Digital Team 28 June 2011

According to a study by Crisil, prices of aviation turbine fuel, kerosene, bulk of fruits and vegetables have all witnessed double-digit inflation over the past three years while milk prices have nearly trebled during the last two years

Surging inflation cost India households an additional burden of nearly six lakh crore rupees over the last three financial years. In a study, CRISIL said, that growth of private consumption expenditure in nominal terms increased to nearly 17% per year during this period from 14% in the preceding three years, mainly due to a rise in food inflation.

"The rise in inflation to 8% per year during 2008-09 to 2010-11, from 5% in the preceding three years, eroded the purchasing power of money and inflated the consumption expenditure bill of Indian households by Rs5.8 trillion," said Dharmakirti Joshi, chief economist, CRISIL.

According to the study, inflation, as measured by changes in wholesale prices, or consumer prices, does not have a uniform impact across income groups. Spending patterns vary across households, and hence, differences in price increases across goods and services lead to unequal levels of inflation for different households.



The middle class population spends a bulk of their income on discretionary items like TVs, ovens etc, and therefore benefit from the price decline across these categories. Low income groups, in contrast, have lower discretionary income to spend on consumer durables, and hence, have not really gained from this trend. Given that poor households spend a higher proportion of their income on food-related articles, WPI inflation understates inflation faced by poor households.

"The middle and high-income groups benefit more from falling prices of non-food manufactured items, particularly durable goods, as they have higher disposable income to spend on other goods and services including consumer durables, and for savings. The poor, with limited discretionary income to spend on consumer durables, do not benefit much from their lower prices. In contrast, rising prices of food items strain their discretionary spending," said Mr Joshi.
 
In recent years, demand for both food and non-food articles has increased rapidly as incomes of both relatively poor and middle class population have risen steadily. However, prices of primary food articles have risen more sharply than manufactured goods, CRISIL said.

Among 316 goods that have clocked a sharp increase in prices, 36 are raw food articles and 14 are fuel items. Prices of aviation turbine fuel (ATF), kerosene, bulk of fruits and vegetables have all witnessed double-digit inflation. Inflation in eggs, meat and fish averaged at 23.6% in 2010-11, while inflation in milk stood at 19.7%. Milk prices have nearly trebled during the last two years. As disposable incomes rise, consumer preferences have been shifting towards 'protein-based' food items such as eggs, meat, fish and milk from traditional food items like food grains and  cereals, thereby pushing up prices of the former category.

During 2008-09 to 2010-11, food inflation was at 11.6% as compared to non-food inflation of 5.7%, and within the non-food category prices of many items declined. The fall in prices was more evident in the durables category like television sets, washing machines and air conditioners.

According to Vidya Mahambare, senior economist, Crisil, contrary to general perception, prices of several commodities do decline even during periods of high inflation. Prices of many consumer durables have declined in the last few years. If adjusted for improvement in quality of goods, the decline would be even sharper. "Consumers immediately feel the impact of rising inflation in food articles because these items are purchased on a daily basis. Durables are not purchased frequently, and hence, a fall in their prices tends to be overlooked while forming inflation expectations," she said.

Higher food prices should be an incentive to enhance production of food items, but this has not happened so far.  In addition to price signals, productivity improvement in food/agriculture categories would require better technology and improved investments in irrigation. In the absence of these measures, high food inflation is here to stay, the ratings agency said.

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