Economy
Higher inflation cost households Rs5.8 trillion over last three years

According to a study by Crisil, prices of aviation turbine fuel, kerosene, bulk of fruits and vegetables have all witnessed double-digit inflation over the past three years while milk prices have nearly trebled during the last two years

Surging inflation cost India households an additional burden of nearly six lakh crore rupees over the last three financial years. In a study, CRISIL said, that growth of private consumption expenditure in nominal terms increased to nearly 17% per year during this period from 14% in the preceding three years, mainly due to a rise in food inflation.

"The rise in inflation to 8% per year during 2008-09 to 2010-11, from 5% in the preceding three years, eroded the purchasing power of money and inflated the consumption expenditure bill of Indian households by Rs5.8 trillion," said Dharmakirti Joshi, chief economist, CRISIL.

According to the study, inflation, as measured by changes in wholesale prices, or consumer prices, does not have a uniform impact across income groups. Spending patterns vary across households, and hence, differences in price increases across goods and services lead to unequal levels of inflation for different households.



The middle class population spends a bulk of their income on discretionary items like TVs, ovens etc, and therefore benefit from the price decline across these categories. Low income groups, in contrast, have lower discretionary income to spend on consumer durables, and hence, have not really gained from this trend. Given that poor households spend a higher proportion of their income on food-related articles, WPI inflation understates inflation faced by poor households.

"The middle and high-income groups benefit more from falling prices of non-food manufactured items, particularly durable goods, as they have higher disposable income to spend on other goods and services including consumer durables, and for savings. The poor, with limited discretionary income to spend on consumer durables, do not benefit much from their lower prices. In contrast, rising prices of food items strain their discretionary spending," said Mr Joshi.
 
In recent years, demand for both food and non-food articles has increased rapidly as incomes of both relatively poor and middle class population have risen steadily. However, prices of primary food articles have risen more sharply than manufactured goods, CRISIL said.

Among 316 goods that have clocked a sharp increase in prices, 36 are raw food articles and 14 are fuel items. Prices of aviation turbine fuel (ATF), kerosene, bulk of fruits and vegetables have all witnessed double-digit inflation. Inflation in eggs, meat and fish averaged at 23.6% in 2010-11, while inflation in milk stood at 19.7%. Milk prices have nearly trebled during the last two years. As disposable incomes rise, consumer preferences have been shifting towards 'protein-based' food items such as eggs, meat, fish and milk from traditional food items like food grains and  cereals, thereby pushing up prices of the former category.

During 2008-09 to 2010-11, food inflation was at 11.6% as compared to non-food inflation of 5.7%, and within the non-food category prices of many items declined. The fall in prices was more evident in the durables category like television sets, washing machines and air conditioners.

According to Vidya Mahambare, senior economist, Crisil, contrary to general perception, prices of several commodities do decline even during periods of high inflation. Prices of many consumer durables have declined in the last few years. If adjusted for improvement in quality of goods, the decline would be even sharper. "Consumers immediately feel the impact of rising inflation in food articles because these items are purchased on a daily basis. Durables are not purchased frequently, and hence, a fall in their prices tends to be overlooked while forming inflation expectations," she said.

Higher food prices should be an incentive to enhance production of food items, but this has not happened so far.  In addition to price signals, productivity improvement in food/agriculture categories would require better technology and improved investments in irrigation. In the absence of these measures, high food inflation is here to stay, the ratings agency said.

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Full Plan panel meet next month to approve Approach paper

The Approach paper provides broad framework of the government policy to be pursued in the five-year period to achieve the desired growth rate. After approval of the Approach paper by the full Plan panel, the document will be placed before the Union Cabinet for consideration

New Delhi: The full Planning Commission headed by prime minister Manmohan Singh is likely to meet by July end to approve the 'Approach' paper to the 12th Five Year Plan (2012-17) that seeks to raise the economic growth to 9%-9.5%, reports PTI.

"The meeting of full Planning Commission chaired by the prime minister may meet by the end of next month to approve the 'Approach' to 12th Plan," a source privy to the development said.

The Approach paper provides broad framework of the government policy to be pursued in the five-year period to achieve the desired growth rate.

Planning Commission deputy chairman Montek Singh Ahluwalia yesterday indicated that the Approach to the 12th Plan would be ready by the middle of next month.

"Internally we have scheduled that the Approach document should be ready sometime in the middle of July," Mr Ahluwalia had told reporters.

After approval of the Approach paper by the full Plan panel, the document will be placed before the Union Cabinet for consideration.

"Since the Parliament's Monsoon session is scheduled from 1st August to 8th September, the document would be placed before country's highest policy making body, National Development Council (NDC), anytime after it," the source added.

The Plan panel is expecting to complete the regional consultations with states for finalising the document by first week of July. The last of such consultation will be held in the first week of July with north-eastern states including Assam, Nagaland, Arunachal Pradesh and Manipur.

The Commission had already completed discussion on the document with four regions including North, East, South and West where out of 22 states, 11 chief ministers turned up to participate in the planning process.

In the full panel meet on 21st April, prime minister Manmohan Singh had said, "The 12th Plan objective must be faster, more inclusive and also sustainable growth... We need to identify the critical areas where existing policies and programmes are not delivering results, and should, therefore, be strengthened or even restructured."

During the full Planning Commission meeting, the panel had presented its take on various issues to be looked at carefully while preparing 12th Plan.

The Commission had suggested fixing the economic growth target of 9%-9.5% in the next Plan.

Aiming at 100% adult literacy, the panel had proposed to increase expenditure on health from 1.3% to at least 2%-2.5% of GDP.

Better performance in agriculture, faster job creation, more emphasis on health, education and skill development and improving programmes aimed at vulnerable segments were among the steps suggested by the Commission for a more inclusive growth in the 12th Plan period.

It had said that in agriculture, 4% growth should be the target during the five-year period.

"We should concentrate more on other foods, and on animal husbandry and fisheries...," the Commission had said, adding that greater interlink between technology and farming should be established.

The manufacturing sector needs to grow at 11%-12%, it had said.

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India-Mauritius DTAA review not to impact FDI in long run

Experts opine that re-negotiation of the DTAA would not be of much help. Instead, the FII investments into the country would be impacted if capital gains tax is imposed

New Delhi: Review of India’s three-decade old double tax avoidance agreement (DTAA) with Mauritius will not impact foreign direct investment (FDI) inflows to the country in the long run, reports PTI quoting a senior government official.

“The DTAA review will not have any impact (on the FDI inflows into the country) in the long run,” an official in the Department of Industrial Policy and Promotion (DIPP) said, adding “genuine investors will continue investing in India,”

Talks for reviewing the DTAA are likely to begin in July or August.

While the government has been pressing for re-negotiating DTAA with Mauritius seeking to plug the loopholes and revenue leakages, some experts have raised concerns that the move may impact foreign direct investment (FDI) into the country.

Nearly 42% of FDI into India is routed through Mauritius. Likewise about 40% of the FII fund flow into the country is believed to be routed through the island nation. A large majority of them are third country investors, who use the DTAA for saving capital gains tax.

According the DTAA, capital gains from sale of shares by residents of Mauritius in India would be liable to tax only in that country. As Mauritius does not have capital gain tax, there is no burden on investors routing money to India through circuitous route.

In the wake of pressure on the government to go after black money, it is in the process of renegotiating the DTAA with several countries mainly tax havens like Mauritius.

Experts, however, said that re-negotiation of the DTAA would not be of much help. Instead, the FII investments into the country would be impacted if capital gains tax is imposed.

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