August 16, 2021 9:20 pm

Stagflation in J&K

Exorbitant living costs and contracting economy

ONE of the many functions of money is to store value. Whenever someone adds value to the economy in the form of providing goods or services, money that they receive is a sort of a receipt which they can then exchange with other goods and services in the economy as per their need. This arrangement, however, becomes questionable when these pieces of receipts lose their ability to store the value of one’s productivity. This robbing of value often happens due to increase in the supply of such receipts in the system. And it becomes even more ethically questionable when the supply of such receipts is controlled by none other than the Government itself.

The seeds of this global monetary economic system that we know today, were sown in the early 1970s. It was when the post WWII Gold backed Bretton Woods agreement was unilaterally abolished by the United States to make way for the present day fiat currency system. Since then, central banks across the world have been grappling with the problem of synchronising money supply with the productive capacity of their respective economies in order to manage growth while maintaining the purchasing power of currency at the same time. However, during times of low economic activity or poor fiscal resources, a standard tool kit adopted by Central Banks across the globe is to infuse more money supply in the system with an objective of shoring up demand or supporting Government expenditure. This tightrope walk often leads to bouts of inflation and valleys of recession. Recent hyperinflation scenarios in economies of Zimbabwe and Venezuela are typical examples of how poorly managed money supply in the economy can lead to currency notes becoming worthless pieces of paper.

Since the onslaught of Covid19 and the subsequent economic recession in India, the monetary response by the Reserve Bank of India has been aimed at infusing tremendous amounts of money supply in the economy. With way too many receipts (currency) floating in the economy coupled with supply side disruptions, the erosion in the value of Indian Rupee has been substantial. A deep cut in economic output with a contraction of -7.5 in the GDP as on March 2021 is making things even more grim.

On 12th August 2021, National Statistical Office (NSO) – Ministry of Statistics and Programme Implementation (MoPSI) released All India Consumer Price Index (CPI) figures for July 2021 inflation. As per MoPSI, all India CPI averaged at 5.59, which was comparatively lower than June 2021 of 6.26. Pertinent to mention that the stated comfort level by RBI for inflation is around 4%. J&K’s inflation on the contrary went from an already high of 7.42 in June 2021 to a whopping 7.81 in July 2021. This overheated inflationary pressure in J&K has been consistently hovering around this territory for over a year. The inflation has been primarily rooted in the supply side of the equation.  It’s a cost push rather than demand pull inflation driven by supply side bottlenecks & furthered by exploitative excise/VAT on Petrol/Diesel/LPG. Besides treacherous road links leading to logistical cost disadvantages, frequent restrictions in movement of men & material is only worsening it.

The methodology adopted for calculation of inflation under CPI takes into account a basket of essential and basic items like food, fuel, apparel, education, healthcare, transportation, housing, recreation and household goods and other services. Food inflation has been driven by a huge spike in prices of cooking oil, eggs, pulses and non-alcoholic beverages. In other segments, fuel prices, transportation costs and healthcare have registered a very unhealthy growth.

This untamed Inflation is making it excruciatingly hard for economically vulnerable sections of the society to make ends meet. To make the situation even worse, the contraction in J&Ks economy since August 5, 2019 as per various independent estimates has been a staggering negative 20-25%. Recession coupled with inflation is a classic case of a lethal stagflation. This is also reflected in the job losses data published by the Centre for Monitoring Indian Economy (CMIE). As per CMIE J&K’s unemployment ratio for the month of July is 15.4 %. This implies approximately 7 lakh bread earners in J&K are unable to find dignified income generating work in the economy. Seven lakh is proportionally a very big chunk of the total workforce which is around 44 lakh. This loss in income in turn pushes a lot of households to abject poverty.

Coupled with the fast eroding value of money due to inflation, the situation is rapidly spiraling down into a lethal mix of despair and survival crisis. Rising cases of suicides and drug abuse have a strong correlation with this toxic income and inflation crisis. Economic miseries that have unfolded in the last two years are taking a serious toll on the socio-economy of the region.

In addition to this, high levels of inflation also erodes the value of hard earned savings. With over Rs. 1.3 lakh crore lying in bank deposits in J&K UT at an average annual Interest rate of only 5.1-5.5%, J&Ks latest inflation data at 7.81% poses a serious challenge. The regional liquid wealth is eroding at a faster rate than what is being compensated by the interest payments. These deposits are earning a negative real rate of interest. Which implies people are actually losing money by keeping it in bank deposits. Saving in a rapidly inflating currency is a bad idea. During inflationary times it’s always profitable to store value in other asset classes instead of fiat currency. Borrowing, however, during these times for creating revenue generating assets rather than consumption or speculation is a better financial strategy.

The immediate regional short term policy response should first aim at reducing exorbitant VAT on petrol, diesel and LPG. This small revenue sacrifice by the Government will have far reaching benefits in easing up the inflationary pressures. Besides this, supply side bottlenecks on account of excruciating restrictions in movement of men and material needs to be revisited. This will smoothen up the flow of economy and ease out supply side disruptions, making availability of goods and services at cheaper costs. Moreover, availability of food, healthcare and education on subsidised rates to the economically vulnerable sections of society deserves to be among the top priorities of the administration. This inflationary wave as per the indicators is here to stay for another quarter or two. Sustaining this needs a well calibrated and timely response from the policy makers. It’s not just about the people; a defunct crisis laden economy is in nobody’s interest. Govt. needs a well functioning economic system to earn taxes and fill its highly indebted coffers. Therefore, rescuing the economy is in every stakeholders interest including the tax dependent state exchequer.

Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer 

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Ejaz Ayoub

Ejaz Ayoub has been working in the BFSI industry in the field of Financial Risk Management, Strategy and Foreign Exchange. He can be reached
Ejaz Ayoub

Ejaz Ayoub has been working in the BFSI industry in the field of Financial Risk Management, Strategy and Foreign Exchange. He can be reached