Inflation hits Urban Poor Harder

Inflation the world over has few friends, but it certainly has none amongst the urban poor. For, while the countryside may get some returns from spiralling food prices – it is the intermediaries who reap the harvest – that result from inflation, the urban poor have only to pay more, coming as they do at the end of the food chain.

Hovering at around 12 per cent – levels last seen in May 1995 – the inflation rate has been fuelled by rising food and fuel prices. Consider this, food product costs, including those of bread, salt, edible oils and tea, have shot by over 14 per cent year-on-year while fuel prices are up by over 16 per cent. But these are figures that have been computed using the Wholesale Price Index (WPI), which measures the level of price changes only at wholesale or at the producer level and does not reflect the actual price hike that the consumer is paying.

And, with food and fuel accounting for a majority of their household expenditure, the impact of the rise in their prices on the budgets of the urban poor has been manifold. According to data collected by the Central Statistical Organisation, in 1993-94, households were spending roughly 56 per cent of their monthly budget on food and 11 per cent on fuel. By 2003-04, this stood at 45 per cent and 17 per cent, respectively.

Says Chamanlal, a kulcha-chhole (local bread with white gram) vendor, “the cost of ingredients has almost doubled in last four months. But, if I double the cost per plate, I will lose my customers. I can only make a marginal increase and that means that I take home much less than what I did earlier.”

But why is that the urban poor are more affected. Says an IMF analysis released in July 2008, “the urban poor are the most affected by high food and fuel prices, as the rural poor are more likely to be at least partially self-sufficient in food supplies… (Also) the direct and indirect impact of fuel price increases on the poor is still likely to be large for the urban poor.”

The impact worsens when the increase in inflation is rapid, as has happened in recent days. As a result, keeping pace with it in terms of wage hike or similar steps is impossible. Abdul, a small juice stall vendor, explains. “The cost of fruit and vegetables has gone up manifold and is still on the rise on almost a daily basis. But, I can not keep increasing our prices in tandem, else I will lose customers.”

It’s no secret. Economists all over the world talk about it and agree on this one point – urban poor are most directly affected by higher costs of food. With inflation rising almost phoenix-like over past few months, it is the poorer sections residing in the cities who are facing the worst. The reason for this is simple, urban poor come right at the end of the consumer chain for any item of purchase.

“At least back in the village, I could get food for my family from my meagre land holdings,” said Ramprakash, an auto driver in the Capital. “Food for the family is the most important thing, other things can come later,” he said adding, “in my village I could have provided that for my children whereas here I have to buy everything from a shop.”

Urban poverty may be even more debilitating than rural poverty because in urban areas, unlike rural areas, access to virtually all goods and services depends on having a cash income. Furthermore, services that governments usually provide free in rural areas, such as schooling, carry costs for households in urban areas—for example, school fees and expenditures for school uniforms, books, and transportation.

As incomes shrink, the first step that a person takes is to compromise on quality and even if does not suffice, cut off certain things off his daily use. “I have reduced my buying of vegetables,” says Brijmohan Chaurasia, a cigarette and paan (betel) vendor. “Most of the days I make do with daal (gram) and chawal (rice) as I can buy hem in bulk and use for a larger number of days,” he says. Obviously, the compromise for a longer period can eventually have a telling effect on health in such cases.

The effect on health seeking behaviour and nutritional intake is enormous. A large section of the urban population already lives under extreme deprivation. The fuel prices also make an indirect impact on urban poor as it leads to increase in food costs and also transportation costs. The increase in local travelling costs that urban poor do on a daily basis, does put a strain on their meagre earning capacities. So not only do they have to buy food material at a high cost, but also have to give extra from their earnings to reach their place or area of work.

The recent micro-credit boom also has to be viewed with caution – and through the inflation lens. When real incomes come under stress, the urban self-employed look at expanding their activity to increase incomes. But, if they put credit to unproductive use like meeting expenses, the danger of a credit trap begins to take shape.

Clearly, supply side policies are critical for managing inflation, particularly in agriculture. Finding immediate answers to inflation induced by commodity-specific supply shortfalls is difficult. A durable solution to such inflation problem has to be found in increasing yields and domestic output for products such as pulses, edible oils, rice and wheat. There is tremendous scope for increasing yield levels through technology diffusion. Simultaneously, there is a need to recognise that there could be a potential contradiction between a ‘remunerative’ price for the farmer and a ‘fair’ price for the consumer in the short run. The same contradiction arises in the case of pricing of petroleum products. The reconciliation of such a contradiction ought not to be in terms of an expensive compromise of fiscal correctness.