The government is claiming a ‘historic’ economic growth of 8.35 per cent. The prime minister and his economic team do not tire of talking about the benefits that it would bring. But in doing so, the government is looking the other way so as not to see the monster of inflation that is rearing its ugly head. For the first time in many years, the country is facing double-digit inflation. Growth does not mean much to the citizen, but inflation does. The rising cost of living, eroding purchasing power, high-level of indirect taxation, static wage structures and limited job openings have combined to push people towards crime, corruption, rent seeking. And for the desperate: suicide.
In this special report, Dawn’s team of economic reporters seeks to gauge inflation’s impact on different classes, their response to the price hike, the changes it has brought about in the marketplace and consumption patterns, analyze both fiscal and monetary policies and seek the views of the government on its strategy to chain the monster.
KARACHI: The economy is growing this year by 8.35 per cent, which is much faster than the targeted growth of 6.6 per cent, and very impressive, and the government deserves its due. But for a common man, all that is washed away by the spiralling rate of inflation. At the start of the financial year, the government thought that essential goods would cost five per cent more by year-end, but still a month away from the date, prices have increased by 11 per cent — a double-digit inflation witnessed by the country for the first time in many years.
For this special issue, our team of reporters has tried to identify factors that have contributed to this price spiral and to gauge government’s response. Seeking to peep into the lives of common people, an effort has been made to understand how different segments of the population are trying to meet the increasing demands with diminishing means. In Lahore, Peshawar, Quetta and Karachi people of lower and lower middle classes, white collar labour, school teachers, office workers, clerks, lecturers, professors, ordinary doctors, technicians, traders and the likes, were found to be grinding under the wheel of galloping inflation.
Of all things, food costs more. Inflation in food items is higher than in other categories. Though the weightage of food bill in family budgets has been reduced from 49 per cent in 1990-91 to 44 per cent in 2000-01, on an average it still eats much of income of the lower classes. The inflation, therefore, is class sensitive. The more poor the family, the harder it takes the brunt of its blow.
In Karachi and Lahore, citizens who fall in the middle class income group were found to be the worst hit by the increase in prices of essential items that make up the Consumer Price Index (CPI). Mostly literate, this class cherish his dreams of economic prosperity for his family but has none or limited means to raise the family income. Slightly better off middle class enjoys a degree of social status and strives hard to cling on to it for his social survival. Consistent erosion in value of incomes and savings is pushing middle income groups to the edge. To avoid a free fall they tend to miss no opportunity to earn a few rupees extra to keep their families from slipping on a social scale. Though positioned disadvantageously, this class ends up paying more in taxes as percentage of their income than anyone else. Compound effect of direct and indirect taxation on salaried class is drastic. Their total contribution to the national kitty is many times more than the rich of this country. They chip in most in indirect taxes — such as General Sales Tax (GST) — and also are the biggest contributor to direct taxes, for they receive their pay cheques, only after the employer has deducted taxes at source.
More enterprising middle class people were found to be working at two jobs or managing some petty side business. In many families, both members have started working, which wasn’t the norm before. Most, however, with no viable option are forced to compromise on their standard of living. To make both ends meet, they move to cheaper locality to save on rent or even compromise on the quality of education of their children by shifting to schools that charge lower fees. Unable to afford the doctors’ consultation charges and medical bills, they run to homeopaths or soothsayers. They have also started to cut out such ‘luxury’ items as meat and dairy products from their food budgets.
If such is the case of the middle class, it is of little significance to talk of the poor, who, according to estimates, make a third of the country’s population or some 50 million souls. They have been pressed harder against the wall in the absence of a social security net. Is it surprising then, that financial insecurities appearing to be blurring the distinction between fair from foul means of earnings in the society?
It is unrealistic to expect people to keep coping up with the current trend of inflation indefinitely. The government is trying to arrest the price hike but the official response is too late and too weak. The policy of gradual tightening of the monetary policy by the State Bank of Pakistan and fiscal measures of the government to allow import of a few selected items from India could at best provide a temporary relief. To deal with the contagion that can eat the growth hollow from inside and blur the prospects of future, there is a dire need to look for a more comprehensive set of policy package.
Our investigations revealed that in Balochistan problems are compounded since the devolution of power has rendered price monitoring mechanism of the government ineffective. The district administration has failed miserably to keep local cartels dealing in eatables under control. In NWFP, besides other problems the middle class that obtained loans for consumer durables is finding hard to stick to repayment schedules. Bankers are apprehensive of the situation and are found fearing a crisis in banking in a year or two because of wide scale default on account of consumer’s loans.
The inflation has started to impact industrial activity as well. It has escalated the cost of production as utilities and transportation has become more expensive. Besides, the rising cost of living has put industry under pressure to allocate more in wage bill. Many industrialists believe that in an environment of fierce competition industry stands little chance, if the cost of doing business continues to climb at the current fast pace.
A major concern both for household and industry is the phenomenal increase in property prices that has jacked up rental value as well. This has rendered feasibility of new industrial projects unviable and made residential plots and housing beyond the reach of ordinary man.
It was also observed that prices of all consumer items have not increased at the same pace. In fact there have been certain categories of consumer items where prices have actually declined. This trend was witnessed in goods and services, which were liberalized and more intense competition led to a price war to win a share in the local market. Hence telecommunication is cheaper today than what it was five years ago and so is the case with many electronic appliances such as TV, AC, home appliances, etc. Clothing is another item that offers wide varieties and low prices at the marketplace.
Major multinationals who keep a watchful eye on the income trends of the middle class, have begun to follow innovative marketing strategy. To keep their customers loyal, these companies now offer products in small quantity packs which are affordable, despite the depleting purchasing power of the consumer. Hence shops are full with ticky packs and sachet of all conceivable consumer items hanging from threads along the walls. These include shampoos, ghee, cooking oil, small packs of biscuits and so on.
To sum up, it has to be said that inflation is a monster that is rearing its ugly head. Is has to be chained. Granted that a growing economy may experience some inflation as there is a time lag between spur in demand and readjustments in the economy to match it with adequate supplies. (India, growing at the rate of above six per cent has inflation at the rate of five per cent). This could be one of the factors in Pakistan’s inflation scenario. But the most overbearing factor, however, that led the inflationary situation to the current stage is the failure of the economic managers to channelize post-September 11, 2001 liquidity in the economy to the productive sectors.
There was a sudden increase in the amount of money floating in 2002 due to reverse flight of money back into the economy, greater flow of remittances, money transfers from banks to public because of lax monetary policy. It was lack of avenues of productive investments that diverted this money to speculative activities in real estate and capital market. It also went into commodity market and created distortions leading finally into activating the price spiral. The industrial and agricultural sector will have to be made attractive for the private sector investment to broaden the base of the economy as monetary measures alone cannot control the inflation without discouraging development agents and arresting growth rate.
