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Govt claims record low inflation, so why are prices rising?

For the common man, the last couple of months have been a cruel paradox. The government has been crying itself hoarse from the rooftops that inflation has come down to record levels, from a high of 6.5 per cent in June last to an astonishing 3.2 per cent last week.

What baffles consumers is the fact that prices have been increasing and show little inclination of ever coming down.

The finance ministry has put out figures to show how the wholesale price index over the past six weeks has been the lowest in 11 years, having dropped from 6.5 per cent in November 1996 to 3.5 per cent to November 1997. Moreover, the Consumer Price Index has dropped from 8.5 per cent in November 1996 to 4.7 per cent in August 1997 (the latest figure available).

The fall in the WPI and CPI made everyone in the financial world so euphoric that former Reserve Bank of India governor C Rangarajan made a special mention of the downtrend when releasing his credit policy in October. The government claims that prices in November showed an increase of barely 3.2 per cent and that real prices (what the CPI reflects) are up by only 4.7 per cent. In short, it says the cost of living, going by the CPI, is up under 5 per cent.

Translated into layman terms, it means that if a commodity cost Rs 100 in November 1996, it would today cost Rs 103.2 in the wholesale market and Rs 105 in retail shops.

Now, does this reflect reality? "Not at all," retorts Zeenia Kavarana, who manages the budget of her four-member family living in Bombay. "Compared to last year when I spent Rs 5,000, my monthly budget for essentials and daily expenses is up by over Rs 1,000 even through there is no increase in consumption," she says angrily. The increase is clearly 20 per cent from November 1996 to date.

Laments Judith Fernandes, who works for a multinational firm, that her grocery bill has shot up from Rs 2,000 in November 1996 to over Rs 2,400 now. "My expenses on green groceries alone have increased from Rs 250 a week to Rs 400 a week. That is over 25 per cent of the family's monthly expenses," she wails.

What's more, the rise in prices is across the board. Pulses, rice, oil, milk, vegetables and fruits -- the mainstay of millions of vegetarians -- have all recorded increases of over 20 per cent, while sugar, wheat and rice rose over 30 per cent. This shows the trend, particularly as a number of these commodities are sold as packaged products which carry maximum retail price tags on the basis of which taxes are collected.

The finance ministry, therefore, cannot claim ignorance of the price variance. Also, while the price rise in many cases is a result of the higher levies on freight and transport, but it is still very high.

Gurmeet Singh, a bank employee, asks discerningly: "Why should the cost of wheat be Rs 16 per kilogram at the retail level when the government procures it at around Rs 5 per kg, even if one allows for margins of fair business?" Clearly, the government appears to have absolutely no control over what happens at the retail level and there is a major gap between what it perceives as the price of essentials and actual retail prices.

The price rise has hurt non-vegetarians more than the vegetarians. Fernandes, for instance, says the cost of fish, mutton, chicken and eggs has increased drastically. "The cost of fish alone has gone up by over 20 per cent in the last year and we have to think twice about eating it now," she complains. Vasant More, a taxi driver and head of a family of six, has virtually given up eating mutton as the price has increased by over 30 per cent in the past year. "Mutton is now limited to special occasions," he says with sadness.

Reflecting the common man's view, Ahmedabad-based Consumer Education and Research Centre's Joint-Managing Trustee V H Munshi states, "The general consumer's grouse is that the price rise has not been slowing to the rates being shown about. In fact, consumers connected to retail prices are grumbling that prices have risen much more than declared."

Says Vimal Parekh, a leading tax consultant, "The only item reflecting the impact of inflation-control is the price of television sets." Yet, if television sets have become cheaper, viewing them certainly has not. One consumer points out that the monthly electricity bills of most households have gone up by over 30 per cent. "If you have children staying up late or using the computer, it goes up by another 10 per cent," he

Other costs have risen such as the expense involved in commuting daily to work and back. Thanks to the hike in petroleum prices, monthly transport costs are up by at least 25 per cent. And if the middle class is feeling the pinch, the lower-middle class and daily-wage earners are in a much worse shape.

Given the fact that the lower classes do not enjoy the benefit of indexation, not only do they face an uncertain income profile, they have no avenues for adjusting to the higher cost of living. Besides, middle-income families still have the option of becoming members of co-operative societies or buying goods in bulk at lower cost, usually at wholesale prices. However, this option is hardly available to the poorest of the poor for whom the concept of monthly provisions is simply alien. And the irony: the government's inflation-control programmw is supposedly targetted at the poor.

If people in general are not too thrilled with the government's tall claims of inflation-control, it seem the government too is increasingly losing faith in the numbers its ministry has been projecting. Take the case of dearness allowance, which amount is based on the price index and inflation, paid to the employees of nationalised banks.

According to the Indian Banks Association, the banks paid their clerical staff (basic salary: Rs 1,750 a month) Rs 820.75 as DA last November while the amount was raised to Rs 987.35 this year. Similarly, a bank officer (basic: Rs 4,250) got Rs 2305.62 as DA this year compared to Rs 1,993.25 last November. In both categories, the rise in DA is between 16 and 20 per cent. This is considerably higher than the government's own estimate of inflation.

Of course, the finance ministry is obliged to pay its employees DA at rates higher than what it believes to be the rise in prices and cost of living. It could well be argued that the computation of DA for bank employees includes factors that are not taken into account while calculating the consumer price index. But it also cannot be denied that the DA is based on the CPI being quoted and if the other parameters are not included, it is not anybody's, but the government's fault. Perhaps it is time the government realised the weightage these factors have on family budgets and adapted accordingly.

Says a senior Reserve Bank of India official, "The basket of items which are considered to reach the CPI figure is bad economics and an even worse joke." According to him, it has perhaps not been changed from the time the British formulated it way back in 1934.

Munshi agrees that the CPI is not realistically based. "The computation does not include vital costs like housing, electricity charges, communication costs and educational expenses," he says.

The government certainly comes across in poor light. It might be politically expedient for it to trumpet its achievements as macroeconomic parameters, but unless they are translated into tangible benefits for the common man, very few will buy the figures or believe the government.