Beyond falling profit margins, slowing industrial growth, high interest rates and voter uncertainty, there are two new beasts that high inflation, across the world, is unleashing — riots in poor countries and lifestyle changes in richer ones. Backed by a 39 per cent rise in prices over the past year, food riots erupted in countries as diverse as Egypt and Indonesia, Guinea and Mexico, Haiti and Uzbekistan, Mauritania and Yemen.
On the other side of the wealth divide, the rise in oil prices is going to change more than just diets; US citizens are going to see lifestyle changes. Under risk is the country’s suburban economy, where workers drive 100 miles to work on cheap gas. Will workplaces move to where the workers are or vice versa, will technology replace human interactions, these are questions companies and employees there are asking.
If the spectre of economic darkness is invading the prosperous West, it isn’t like the East is thundering ahead. As per data collated by J.P. Morgan in a new report, barring Malaysia, Thailand, Nigeria and Argentina, all the other 24 emerging economies, including China, Russia and Brazil, have inflation rates that are higher than targeted inflation. Or, as in the case of India, more than what’s tolerable — against a target of 5.5 per cent, the current inflation rate, at 7.6 per cent, is high by a huge margin.
In the past 18 months, this number has come out of its safe and invisible academic and corporate enclosures, where it was used to benchmark many associated economic indicators like interest rates, bond prices and the Sensex, into drawing rooms (and often bedrooms) of Indian homes. As a ‘burning issue’, inflation single-handedly has scorched household budgets, shaved off margins from companies’ profits and is gaining notoriety as this government’s prime nightmare as it hopes to fight elections in the next 12 months.
Rising prices of food have skewed economic allocation of the aam admi towards necessities like food. And if they go the way they are, this public enemy No. 1 has the power to pull out children of poorer households from schools, as they redistribute resources from investment into a brighter future for their children towards negotiating a gloomy present. Making it worse for the UPA administration is the fact that it is the poor who vote in India (unlike in the US, for instance).
As a result, the political cross-currents the government is dealing with have become so complex that decoding it requires the services of statisticians, psephologists, meteorologists, geologists, psychologists and not to forget the ever-flitting economists. The government knows that high inflation is due to global factors — therefore, the same process factors that took the economy on an 8 per cent plus growth trajectory and one that the government went out of the way over the past three years to take credit for. While it wallowed in the praise that followed a globally driven high liquidity-low inflation economic environment leading to higher economic growth for most countries, it is today very comfortable exporting the blame during the current downturn.
The Indian poor, who don’t have a safety net of either net worth (to help them get by for a while) or network (that enables the translation of skills into medium-term sustenance), are the worst affected. According to Josette Sheeran, executive director, UN World Food Programme, “We are seeing those who exist on $1 a day or on 50 cents a day getting hit hardest because they have no resilience and no place in which to retreat.”
In an interview to The Economist, she says, for those living on $2 a day, this crisis means cutting out meat and taking children out of school; for $1-a- day survivors, it means living on cereals. And for those who somehow eke out an existence at 50 cents a day, it means total disaster. For these poor, any recovery would make it that much harder for them, as they would have sold their animals, their houses, their tools of work.
When we look at the political choices against this background — almost four out of five Indians live on less than $2 a day and 250 million under $1 a day — we feel deep compassion for the hungry and can sympathise with the UPA administration on the intent side of the equation. Weighing mass starvation on one side and lower profits on the other, the political economy choices are clear: eat the rich.
Except that the solutions side of the same equation is not so straightforward. The virtual coercion that the government has inflicted on steelmakers last week, making them lower and hold the price line for three months, is intent selling. This week it proposes to squeeze out an encore from cement manufacturers — in hushed meetings there lies the spectre of a cement prices regulator.
These follow accusations of cartel-like behaviour that the government has been shouting from Raisina Hill rooftops for months now — without evidence of any sort. Instead of first accepting the problem and then finding a sustainable solution to it, the government is playing to the voters’ gallery, trying to somehow garner support for its band-aid like behaviour. The troika of Manmohan Singh, P. Chidambaram and Montek Singh Ahluwalia that once spelled economic reforms is today steeped in economic desperation.
Banning futures in select commodities, for instance, knowing fully well that the sole accusation against futures trading is that it allows price discovery (the price of wheat that most officials in the government quote, by the way, is from Chicago Board of Trade, a futures and options exchange) and empowers farmers to plan their produce more efficiently, is extreme anxiety hiding behind what is increasingly being sold as ‘administrative measures’.
This week, C. Rangarajan, Economic Adviser to Prime Minister, said that inflation could fall to 5.5 per cent in the next three to four months due to measures taken by the government as well as expectations of good monsoons. While this will bring some relief from rising prices — not risen prices, please note — the government’s conviction in the success of desperate economics will get further strengthened. In the process, it may well convince a few millions to stamp their vote on the right hand.
Meanwhile, the 300 million who have been able to hitch a ride on India’s 8 per cent GDP growth, negotiating a new India with new currencies like ETFs, EMIs, road rage and airport queues, and for whom the food bill as a percentage of household income is statistically insignificant, will just have to wait their political turn. We saw, as recently as in mid-October 2007, how politically sensitive the issue of food riots can be, when the Congress alleged that Burdwan district of West Bengal faced corruption-led food riots, which the CPI(M) promptly and predictably denied. The UPA administration, I presume, therefore, would do all it can, howsoever illogical or anti-reformist its actions be, to prevent inflation-led food riots at a national level today. Indian politics can take lifestyle changes of the few in stride, not food riots of the many.