GREEDFLATION
1. Context
There is a growing consensus across the world that corporate greed is the new villain in town, spiking inflation even as workers get doubly penalized by low wage increases and higher interest rates.
2. Inflation, Disinflation, and Deflation: Key Concepts
Inflation
- Inflation refers to the rate at which the general price level of the economy rises over time.
- For example, an inflation rate of 5% in June implies that prices increased by 5% compared to June of the previous year.
Disinflation
- Disinflation occurs when the inflation rate decelerates or slows down over a period of time.
- It refers to a situation where prices are still rising, but at a slower rate each passing month.
- For instance, if the inflation rate was 10% in April, 7% in May, and 5% in June, it signifies disinflation.
Deflation
- Deflation is the opposite of inflation and refers to a decrease in the general price level of the economy.
- It occurs when prices decline, leading to a negative inflation rate.
- For example, if the general price level in June is 5% lower than that of June in the previous year, it indicates deflation.
Reflation
- Reflation is a policy response to deflationary conditions.
- Policymakers aim to stimulate economic activity by increasing government spending and/or reducing interest rates.
- The goal is to counter deflation and boost economic growth.
3. Causes of Inflation: Cost-Push and Demand-Pull
Cost-Push Inflation:
- Cost-push inflation occurs when prices rise due to an increase in input costs.
- For example, if there is a sudden increase in crude oil prices, it leads to higher energy costs, pushing up the general price level.
- Rising input costs can be caused by factors such as supply disruptions or increased production costs.
Demand-Pull Inflation:
- Demand-pull inflation happens when prices are pulled up due to excess demand for goods and services.
- If there is a sudden surge in demand that surpasses the available supply, prices can rise.
- For instance, if the central bank lowers interest rates, making housing more affordable and increasing demand for new houses, it can pull up home prices.
4. Impact of Wages, Profits, and Corporate Greed on Inflation
Wages and Demand
- When prices rise, workers often demand higher wages, which increases overall demand.
- However, this increase in wages without a corresponding increase in supply fuels inflation.
- As workers and consumers have more money, prices of goods and services tend to rise, leading to further inflation.
Interest Rates and Wage-Price Spiral
- Central banks may raise interest rates to curb inflation by slowing down economic activity and demand.
- This can result in job losses and mitigate the wage-price spiral, preventing further inflation.
- However, this approach can be seen as unfair and inequitable since it disproportionately affects workers.
Profits and Price Increases
- Price increases can also be driven by companies seeking higher profits, especially during crises or natural disasters.
- In such cases, businesses may raise prices significantly, leading to inflation.
- If the price mark up exceeds the increase in input costs or if companies maintain high prices despite falling input costs, supernormal profits can be generated.
Corporate Greed and Monetary Policy
- If corporate greed is the primary driver of inflation, traditional monetary policy measures may be ineffective and unjust.
- In this scenario, solely focusing on raising interest rates to control inflation may not address the root cause.
- Monetary policies should consider addressing issues related to excessive profit margins and market pricing practices.
5. Greedflation
- Greedflation refers to the phenomenon where corporate greed becomes a significant factor in fueling inflation. Instead of the traditional wage-price spiral, it is the profit-price spiral that is at play.
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Companies take advantage of the inflation experienced by people by significantly raising their prices beyond covering their increased costs.
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This excessive price increase allows them to maximize their profit margins. However, this action further contributes to inflationary pressures in the economy.
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In developed countries, such as Europe and the US, there is a growing consensus that greedflation is the primary culprit behind rising inflation.
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It highlights the role of companies exploiting inflationary conditions to drive up prices and maximize profits.
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Greedflation disrupts the traditional understanding of the wage-price spiral and emphasizes the influence of corporate behavior on inflation dynamics.
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Excessive price hikes by companies contribute to an inflationary cycle, exacerbating the overall inflation levels.
6. Surging Corporate Profits in Post-Pandemic India
Profits Post-Pandemic
- Net profits of 4,293 listed companies in India reached Rs. 2.9 trillion in the March 2023 quarter.
- This figure is over 3.5 times higher than the average quarterly profit earned by listed companies before the 2020 pandemic.
- The average net profit of listed companies from December 2017 to December 2019 was Rs. 0.83 trillion.
- Indian corporate sector has witnessed a significant surge in profits in the post-pandemic period.
- Recent profits are nearly three times higher than previous earnings, indicating exceptional profitability.
- Mahesh Vyas, CEO of CMIE, acknowledged that the pandemic has had a positive impact on corporate profits.
- The sustained high profits cannot be attributed to increased formalization anymore.
- Previously, gains from the formalization of the economy, such as efficient tax regimes under GST, may have contributed to higher profits.
- However, those gains are now considered a thing of the past, as per Mahesh Vyas.
Implications
- The surge in corporate profits raises questions about the factors driving this exceptional growth.
- It highlights the need to assess the underlying causes, including potential economic and regulatory factors.
- Further analysis is required to understand the sustainability and distribution of these profits within the Indian corporate sector.
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For Prelims: Inflation, Disinflation, Deflation, Reflation, Greedflation, Monetary Policy, Fiscal Policy, Cost-push Inflation, Demand-Pull Inflation, and Wage Price Spiral.
For Mains: 1. Analyze the concept of "greedflation" in the context of the Indian corporate sector, considering the surge in corporate profits post-pandemic. Discuss the idea that corporate greed may be fueling inflation in the country.
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Previous year Questions1. With reference to inflation in India, which of the following statements is correct? (UPSC 2015)
A. Controlling inflation in India is the responsibility of the Government of India only
B. The Reserve Bank of India has no role in controlling the inflation
C. Decreased money circulation helps in controlling the inflation
D. Increased money circulation helps in controlling the inflation
Answer: C
2. With reference to the Indian economy, demand-pull inflation can be caused/increased by which of the following? (UPSC 2021)
1. Expansionary policies
2. Fiscal stimulus.
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
A. 1, 2, and 4 only
B. 3, 4, and 5 only
C. 1, 2, 3, and 5 only
D. 1, 2, 3, 4, and 5
Answer: A
3. A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is the "base effect"?(UPSC 2011)
A. It is the impact of drastic deficiency in supply due to the failure of crops
B. It is the impact of the surge in demand due to rapid economic growth
C. It is the impact of the price levels of the previous year on the calculation of the inflation rate.
D. None of the statements (a), (b) and (c) given above is correct in this context
Answer: C
4. India has experienced persistent and high food inflation in the recent past. What could be the reasons? (UPSC 2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change.
3. The food supply chain has structural constraints.
Which of the statements given above is correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: B
5. Which one of the following statements is an appropriate description of deflation? (UPSC 2010)
A. It is a sudden fall in the value of a currency against other currencies.
B. It is a persistent recession in both the financial and real sectors of the economy.
C. It is a persistent fall in the general price level of goods and services.
D. It is a fall in the rate of inflation over a period of time.
Answer: C
6. With reference to the Indian economy, consider the following statements : (UPSC 2022)
1. If the inflation is too high, the Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above is correct?
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: B
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Source: The Indian Express
