Greedflation: Does India Also Have It?

Why in News?

• There is a growing consensus across the world that corporate greed is causing inflation and workers are being doubly penalised by low wage increases and higher interest rates. 
• It is important to understand the policy implications and whether India is also witnessing ‘Greedflation.’

 

What is Inflation?

• Inflation(or the inflation rate) is the rate at which the general price level rises.
• For example, when it is reported that the inflation rate was 5% in June 2023 it implies that the general price level of the economy (as measured by a representative basket of goods and services) was 5% more than what it was in June 2022.

 

What causes inflation?

• Either price gets pushed up because input costs have risen — this is called cost-push inflation.
  • For example, if crude oil prices went up by 10% overnight because of a supply disruption then the general price level will be pushed up because energy costs have gone up.
• Prices are pulled up because there is excess demand — this is called demand-pull inflation.
  • For example, if RBI cuts interest rates sharply and the public finds that buying a house is now quite affordable, since EMIs have fallen, then the sudden surge in demand for new houses will pull up home prices because new houses cannot be made immediately.

 

How is inflation controlled?

• If inflation is because of excess demand, the central banks raise interest rates to bring overall demand in line with overall supply.
• If inflation is due to cost pressures, even then the central banks raise interest rates.
• Of course, raising interest rates does nothing to boost supply. Still central banks do what they can: contain demand because that is all they can do.
• The idea is to prevent something called the wage-price spiral - if prices go up, it is natural that workers will ask for higher wages. But if wages go up, it only fuels the overall demand, while doing nothing to boost the supply.

 

What is Greedflation?

• Greedflation simply means (corporate) greed is fuelling inflation.
• In other words, instead of the wage-price spiral, it is the profit-price spiral that is in play.
• In essence, greedflation implies that companies exploited the inflation that people were experiencing by putting up their prices way beyond just covering their increased costs and then used that to maximise their profit margins. That, in turn, further fuelled inflation.
• In Europe and the US there is a growing consensus that greedflation is the real culprit.

 

Situation in US and Europe

• In the United States:
  • The corporate profits (as a proportion of the national income) have spiked to the highest level in the past 100 years.
  • The price of almost everything in the U.S. economy can be broken down into the three main components of cost: labour costs, non-labour inputs, and the “mark-up” of profits over the first two components.
  • Since the COVID-19 recession in the second quarter of 2020, overall prices in the NFC (Non-Financial Corporate) sector have risen at an annualised rate of 6.1.
  • Over half of this increase (53.9%) can be attributed to fatter profit margins, with labour costs contributing less than 8% of this increase.
• In Europe
  • Chief Economist of the European Central Bank, recently stated that while the biggest driver of high inflation that Europe witnessed in 2022 (since the start of the war) was the spike in energy costs but there was very little contribution of higher wages.
  • There was, however, an extra and significant injection of inflation from rising profits of firms.

 

Policy Implications: Solutions and Trouble with Solutions

• Solutions suggested by Economists
  • One effective way to prevent corporate power from being channelled into higher prices in the coming year would be a temporary excess profits tax.
  • The idea of windfall profit taxes on companies: A tax imposed on such an unexpected rise in profits is called a windfall tax. They are usually imposed when there is a sudden increase in profits in a particular sector.
• Trouble with these Solutions
  • The IMF study noted that there is still some doubt that every firm has exploited consumers and fuelled inflation.
  • It is a challenge as to who decides what is justified increase and what is price-gouging.

 

Is Greedflation happening in India?

• Only after the study of Net Profits and What is Causing Higher Profits, it can be said whether Greedflation is happening in India or not.

 

Net Profits

• According to Centre for Monitoring Indian Economy (CMIE) data the net profits of listed companies is at a record high.
• The Indian corporate sector has generated superlative profits in the post pandemic period.
• Profits during recent times have been nearly thrice the profits corporates earned earlier.
• These Higher profits can come only from: higher sales (with the same profits margins), higher profit margins (with the same level of sales)or a combination of higher sales and higher profit margins.

 

What is contributing to higher profits?

• According to CMIE sixty per cent of the growth in net profit can be attributed entirely to the increase in profit margin.
• The increase in sales contributed an additional 36 per cent and the rest was a bonus from a combination of the two.

 

Do these higher profits point to the existence of greedflation in India?

• Data shows the existence of a sharp spike in profits.
• So, prima facie there is a very good chance that corporate greed also played a role in spiking the inflation rate in India.

 

Conclusion

• Since there are mixed notions about ‘Greedflation’ it is important to discuss what can be done to control “greedflation” as firms take advantage of the crisis to raise prices. 
• Ultimately, it is the common people who suffer.

 

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Q1) What is CMIE?

The Centre for Monitoring Indian Economy (CMIE) is a private limited organisation that functions as both an economic think tank and a provider of business intelligence information. The CMIE research department has developed databases on India’s economy and private sector companies. CMIE uses a subscription-based revenue model to supply this data in the form of datasets and research papers. It is based in Mumbai and has offices throughout India.

 

Q2) How does inflation affect the economy?

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

 

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Source: The Indian Express