Tuesday, May 21, 2024

Corporate power and Indian inflation

A new explanation has been proposed for the recent trajectory of inflation in India, with implications for its control. The former Deputy Governor of the Reserve Bank of India, Viral Acharya, is reported to have observed (on an Indian news and opinion website on March 30) that, unlike in the West where it abated with COVID-19, core inflation remains elevated in India. This he ascribes to the pricing power of five big corporates (‘Big 5’). The narrative has received wide coverage in the financial press. For readers not acquainted with the jargon of central bankers, ‘core’ inflation is all-commodity inflation stripped of the inflation of food and fuel prices.

The factor of food price inflation

We offer five comments on the claim that corporate pricing power is driving inflation in India currently. First, a divergence between inflation rates in India and the rest of the world is not new. After the global financial crisis of 2008, Indian inflation surged, reaching levels higher than in its epicentre, namely the economies of the United States and the United Kingdom. This was due to a surge in food price inflation in India, driven by negative agricultural shocks and high procurement price hikes. As food-price inflation tends to feed into core inflation, it would be hasty to conclude that Indian inflation is higher than in the West today due to corporate pricing power.

Note that for the month of February the wholesale price (WP) based food-price inflation was 2.8% while that for manufactured products, the largest commodity group in the index, was lower at 2% (Ministry of Commerce, March 14). With food price inflation in India unabated, there is no reason to assert that core inflation should have declined even if it has in the West. There is evidence that in India, food price inflation affects core inflation. This is not surprising after all, for food price inflation enters costs of the non-agricultural sector.

Second, the argument that corporate power underlies elevated core inflation is based on an observation of a somewhat short time period. It is true that while wholesale price inflation has eased very considerably in the six months preceding March 2023, consumer price (CP) inflation has not (National Statistical Office, March 13). But a mismatch between WP and CP inflations is not new. In 2021-22, WP inflation had surged by 12 percentage points but CP inflation actually declined (Reserve Bank of India, 2022). So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.

Third, attributing elevated core inflation in consumer prices, as wholesale prices fall, to pricing power of the Big 5 assumes that these conglomerates have a high presence in retail trade. On balance, one would expect their presence is greater in the manufacturing and infrastructure sectors than in retail. It may be noted that their presence in the economy itself may not be so high. Mr. Acharya is quoted as stating that they account for 12% of non-financial sector sales. To us, this does not signal high pricing power.

Fourth, to compare WP inflation with CP inflation, whether headline or core, is to acquiesce in a mismatch. The commodity basket corresponding to CP includes such items as housing, health, education, recreation and personal care which, naturally, do not enter the wholesale price index. So, we would be comparing apples with oranges here.

Finally, we come to the point that casts doubt most directly on the claim that corporate pricing power is driving current inflation in India. At present we have data for only the first three quarters of the financial year that just ended. However, in all of them, over 75% of the direct contribution to inflation is by sectors in which the Big 5 are unlikely to be represented in a big way, the contribution of food products alone being close to 50% in most time periods. Clearly, it is the rising price of food that is driving current inflation in India.

There is pricing power

None of this is to suggest that corporate pricing power does not exist or that it is not relevant for inflation. Our own published work has shown that there is pricing power in Indian industry and that the rate of profit in India is high in a global comparison. However, the question is the extent to which corporate power is driving overall inflation in India currently, beyond its obvious role in elevating the price level. In theory, corporates can drive inflation if concentration rises continuously and if they come to dominate the economy, in this case retail trade. That we have not reached there yet in India is implied by the fact that the sectors in which the Big 5 are most represented account for less than 25% of the consumer price index. But industrial concentration is most likely rising in India, and the consequences matter for more than just prices.

While public policy in India has a history of being alert to concentration in industry, concentration in the services, as in telecommunications, and in infrastructure, as in ports, is relatively new and it may only just be coming to terms with its implications. As a democracy, India should guard against the potential use of countervailing power by any body pursuing a private interest, whether economic or social, and irrespective of its consequences for inflation. At the same time, it may be noted that India’s corporate sector is diverse and Mr. Acharya’s list includes at least one house that is perceived by the public as embodying business acumen, ethical practices and social responsibility.

In conclusion, we find the framing of the discourse on inflation in terms of core inflation, as when the role of corporate pricing power was brought up, to be limiting. Core inflation leaves out the inflation in food and fuel prices on grounds that these prices tend to fluctuate, evening out the changes, and thus not requiring a policy response. But this is a flawed assumption in the context of India’s economy.

The current inflation control strategy

In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the ‘reforms’ since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably. In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers. India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. It — conveniently for its champions — absolves the policymaker from addressing the challenge of ensuring the production of food at affordable prices. But, the most recent intervention purporting to explain core inflation in India may have had a beneficial fallout after all. It has re-emphasised that the RBI has been unable to control even that inflation which central banks are assumed to be able to.

Pulapre Balakrishnan is at Ashoka University, Sonipat, Haryana. M. Parameswaran is with the Centre for Development Studies, Thiruvananthapuram

#Corporate #power #Indian #inflation

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