Food inflation will hurt the poor

Indebtedness of the poor to rise even in the face of high interest rates

While fears of a drought have receded, the nearly 20 per cent deficiency in monsoon this year is likely to impact the growth in agricultural output. This is likely to lead to an increase in food inflation. How does food inflation impact households? We attempt to answer this question using Consumer Pyramids.

It is common knowledge that high food inflation hurts the poor more than the rich because food forms a greater part of the budgets of the poor. Consumer Pyramids help us in quantifying this difference.

In 2011-12, food expenses accounted for less than 8 per cent of the income of the rich. It accounted for 17 per cent of the income of the higher middle income group and 29 per cent of the income of the middle income group. For the lower middle income groups, the proportion goes up to 47 per cent and then for the poor it shoots up to 82 per cent.

The rich (those who earn more than Rs.720 thousand in a year) account for 1.3 per cent of the households. Food inflation possibly does not matter much for these households. It does matter for the middle income households. Food expenses are not too large, but they are significant. And food inflation can cause some discomfort to these households.

The higher middle income households (annual incomes between Rs.180,000 and 720,000) account for 22 per cent of the households and the middle incomes (Rs.96,000 to Rs.180,000) account for another 28.5 per cent of the households.

This large number of the middle income households make them politically powerful. They account for nearly half the households and are politically sensitive.

However, these middle income classes are sufficiently well off to deal with inflation. As a group they have a reasonable savings rate and are therefore quite capable of dealing with inflation. Consumption expenses of these households are only 50 per cent of their incomes. The possible shrinking of the “surplus” income is likely to have an adverse impact on savings or on the demand for consumer durables or other discretionary spending.

The poorest households do not earn enough to meet their food expenses. Their food expenses were 24 per cent higher than their incomes during 2011-12. These are the households that earned Rs.24,000 or less during the year. They account for just 1.3 per cent of all households of India. But, they number over 3 million and are home to over 13 million people. For these 13 million people food inflation only makes a terrible situation much worse.

Another 10 million households (about 4 per cent of the total) were not much better either. Food expenses took away 75 per cent of their annual income.

These 13 million households containing 55 million people, according to the Consumer Pyramids definition were the poor households of India. These households earned Rs.36,000 or less during 2011-12. Poor, in Consumer Pyramids, are defined by their income levels.

A substantial 47 million households (classified in Consumer Pyramids as Lower Middle Income - II) are also very vulnerable. These households earn between Rs.60,000 and Rs.36,000. Food expenses accounted for a hefty 58 per cent of the income in 2011-12.

This lower strata comprising all households that earn less than Rs.60,000 a year do not have any financial savings and food expenses account for more than half the household income. Thus, an increase in food inflation is likely to increase the debt burden of these 60 million households that are home to over 280 million people.

High or increasing interest rates hurt these households the most because borrowing is a necessity to survive. It is not an option even when interest rates are high. The increase in indebtedness and high interest rates ofcourse, increases the probability of these households remaining in poverty for some time even after food inflation declines.

Consumer Pyramids data suggests that merely providing free foodgrain is unlikely to solve the problem, because cereals and pulses account for only one-third of the total food spend of the poor. Poverty in India is more a story of raising income levels than merely beating hunger through distribution.