The Hindu Business Line : Inflation and the poverty line

With inflation at a three-year high of 7.57 per cent, it is time to remind ourselves again that price rise hits the poor the most. If rapid economic growth can help push many people above the poverty line, inflation on this scale can viciously yank them back. National Sample Survey data show the proportion of people below the poverty line fell from 36 per cent in 1993-94 to 33.2 per cent in 1999-00, a fall of just 2.8 percentage points in a period when both growth and inf lation were high. The average annual growth rate during this period was 6.5 per cent, but the average inflation too was about 6 per cent. The absolute number of poor actually increased during this period. However, poverty fell by 4.3 percentage points between 1999-00 and 2004-05, from 33.2 per cent to 27.9 per cent, when inflation was under 5 per cent, while the average annual growth rate was about 6 per cent. In fact, the rate of poverty reduction, post-reforms, is no better than in the seventies and eighties, when growth rates were lower.

Growth per se does not lift people from poverty. If poverty reduction was significant between 1999-00 and 2004-05 as compared with the earlier period, it was perhaps because of improved employment generation, low food prices and higher real incomes of casual labour. In fact, this was not even a period when farm output improved significantly.

The current debate on whether to prioritise growth or inflation-containment should take stock of India’s recent history. In fact, it is worth looking at whether the ‘jobless’ growth of the early nineties contributed to the manufacturing slowdown that followed, or whether the relatively more inclusive phase in the subsequent years played a role in setting off the current phase of high growth. If this is indeed the case, the importance of curtailing inflation and ensuring inclusive growth cannot be overemphasised.

If 22 per cent of the population lives on less than $1 a day (in PPP terms), another 55 per cent lives on a daily income of $1-2 a day. The latter category, which the report of the National Commission on Enterprises in the Unorganised Sector calls ‘vulnerable’, could become poor if food prices stay high. It does not help that the public distribution system, which is meant to protect the poor from inflation, is riddled with leakages. The Public Accounts Committee points out that the PDS grain is diverted to the extent of 50-70 per cent in Haryana, Madhya Pradesh and Uttar Pradesh, 75 per cent in Bihar and 25 per cent in Tamil Nadu, Andhra Pradesh, Kerala, Orissa and West Bengal. Long-term inflation, particularly in food articles, will exclude large numbers from the growth process.

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