june 26, 2021
Worrisome Trends in Inflation and Unemployment
Both the problems will further hurt the disadvantaged groups and push more people into poverty.
N
ow that the second wave of the pandemic has ebbed,
the policy focus is slowly reverting to the economy. The
economic relief package of `6.29 lakh crore announced by
the government, mainly to provide credit to business, is a pointer
to this. This is also in tune with the official line that, despite the
massive toll on lives, the second wave has caused only a temporary
setback to the economy. In its monetary policy statement (MPS)
in early June, the Reserve Bank of India (RBI) revised down the
first quarter growth in 2021–22 by a third to 18.5%. But the fore-
casts project a largely stable or even higher growth over the next
three quarters. And the lack of high frequency official statistics
on employment losses has been conveniently used to blank out
livelihood issues, albeit a small provision for free food.
So, the June MPS remained focused on reviving and sustain-
ing growth. It has left policy rates at an all-time low of 4% for
around a year now. And the central bank also vouched to con-
tinue the accommodative monetary policy as long as necessary.
Unfortunately, this stance, which prioritises growth over infla-
tion, has been guided by the mistaken expectations that infla-
tion will remain within the targeted band as supply-side con-
straints ease in the coming months. And trends in the consumer
price index (CPI) in the five months up to April, in fact, validated
this argument. But this argument soon fell flat. The most recent
CPI numbers for May, released after the June MPS, saw inflation
surge back above the mandated upper limits to 6.3%, raising
apprehensions about the monetary policy stance.
And the structure of inflation also points upside risks. The
pickup in CPI in May was mainly powered by both rising food
and fuel prices. Food prices more than doubled to 5% in just one
month. And fuel and light prices rose by double-digit rates, the
highest increase in recent years. Other segments where infla-
tion levels hovered around double digits include transport and
communication, health and personal care, all major compo-
nents of the core inflation. That is inflation, excluding that of
food and fuel, which are usually volatile and transitory.
But surprisingly, the MPS had played down trends in core in-
flation. In fact, core inflation, which has generally hovered be-
low the 6% mark for almost a year, has surged up to 6.5% in
May, the highest across all major economies. With core inflation
remaining sticky, and even soaring up above headline inflation,
it is futile to expect consumer inflation to soften very soon.
Economic & Political Weekly EPW june 26, 2021 vol lVi nos 26 & 27
Moreover, the consumer prices will also probably be impacted
by the surging wholesale prices, which have touched a decadal
high of 12.9% in May. And all three major components of the
wholesale price index (WPI), have now shot up by double digits
for the second consecutive month. The rise in prices of primary
goods and fuel are in line with the global boom in commodity
prices. And manufactured goods prices have perked up due to
rising input costs. But the policymakers seem to be betting that low
consumption demand will temper the pass-through of wholesale
prices to core inflation.
And inflation levels also face other upside risks from both the
rising prices of imported oil and the steady rupee depreciation.
Over the last year, prices of the Indian crude oil import basket
have more than trebled and touched $70 a barrel in May 2021, the
highest in two years. And the prospects of an immediate dip in oil
prices are very slim. Similarly, the depreciating rupee has also
added to the inflation woes. The rupee, which has now steadily
depreciated for three consecutive years, is expected to dip fur-
ther with the United States Federal Reserve poised to raise poli-
cy rates. A rapidly depreciating rupee will push up import prices
and further add to the inflationary woes. To sum up, the RBI
should refocus its policy stance to bringing down inflation,
which erodes the purchasing power of the rupee, and hurts the
poor who almost spent their entire earnings on basic essentials.
But inflation is not the only factor hurting the poor and disad-
vantaged groups. More important is the employment loss inflict-
ed by the pandemic, which will appear in official statistics of the
Government of India only after a year’s lag. But the data of the
Centre for Monitoring Indian Economy (CMIE), which is the only
provider of high-frequency employment numbers, says that the
unemployment rate has rebounded. In fact, it already moved up
to double digits in May, the highest after the lifting of the na-
tional lockdown. The CMIE estimates also indicate that 36.8 mil-
lion non-farm jobs have been lost since January 2021, of which
25 million were in May alone. This includes 23.1 million daily
wage jobs, 8.5 million salaried jobs and the rest are self-em-
ployed entrepreneurs. The CMIE estimates that two-thirds of
these jobs may be restored once local lockdowns are lifted. But
that means that around 10 million will still be waiting for jobs.
So, in such a scenario, the only option for the government
is to increase welfare allocations, including for direct transfer
7
COMMENT

of funds and for the employment guarantee programme, to hit by inflation and unemployment and pushed backed into
provide relief and protect lives. The economic relief package poverty. So, tackling inflation and unemployment issues must
ignores this and has allocated just `93,869 crore for free be the fi rst priority. The government can ignore this only at
foodgrains as relief. But this is too meagre to protect the millions its own peril.

8 june 26, 2021 vol lVi nos 26 & 27 EPW Economic & Political Weekly