Lessons for govt from a Mumbai taxi driver: Why inflation is killing growth

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Vivek Kaul

Sometimes it takes a small nudge to start doing what might later seem obvious. A few months back I happened to read Nicholas Epley’s Mindwise—How we understand what others Think, Believe, Feel and Want. Epley is a professor of behavioural science at the University of Chicago’s Booth School of Business.
In this book Epley writes that “isolating activities like commuting are some of the least pleasant of any day.” “Not only is isolation unpleasant, it is bad for your health as well.” Hence, he goes on to suggest that it always makes sense to communicate with your fellow commuters or in case of taxicabs, the drivers.
“In fact, the positive effect of talking to one’s taxi driver is particularly large. Perhaps because taxi drivers come from interesting and varied backgrounds, they seem to make especially pleasant conversational partners, at least for the length of your ride…The stories I get are fascinating, the conversations are almost always interesting, and my experience is consistently better than if I had simply stared out of the window instead…Your ability to engage with minds of others is one of your brain’s greatest abilities. You’ll be happier if you actually use it,” writes Epley.
After reading this book I have “nudged” myself in the direction of trying to have a conversation with the taxi-driver, every time I use a taxicab. Late last night I was coming back home after having dinner and starting talking to the driver. Over the last few weeks the conversation usually starts around the recent increase of the minimum cab fare in Mumbai from Rs 19 to Rs 21. And then it goes off in different directions.
Yesterday night was not different from the usual except for the way the driver reacted. He was of the opinion that the decision to increase the minimum fare from Rs 19 to Rs 21 was a stupid one and that the taxi union hadn’t been doing its job properly. The response intrigued me, given that this was the first time I came across someone who did not seem to be happy at the prospect of a higher income in these inflationary times.
I asked him to explain in detail what he meant. “Main to kehta hoon minimum pandrah rupaiye kar dena chahiye, (I think the minimum taxi fare should be reduced to Rs 15),” he immediately responded. This intrigued me further. “Log taxi le nahi rahe hain. Kaafi samay khaali baithe rehna padta hai (People are not taking taxis and for long periods of time I am just sitting idle),” he continued.
And then he went on to explain that at a lower fare he would get more customers, wouldn’t have to sit idle for long periods of time during the day and would in the process end up making more money, even though the amount of money he would make per kilometre would be lower. Sometimes wisdom strikes you at the most unlikely of places. Last night I had that kind of a experience.
High inflation has been the bane of this country over the last five years. And that has hit all kinds of people including the taxi-driver I was talking to last night. When fares are raised, it means a higher price for hiring a cab for the end consumer. And he or she is not always ready to pay for that. Hence, an increase in taxi fare, which is basically inflation for the end consumer, leads to loss of business for the taxi-driver.
The way it works for the taxi-driver at the individual level, also works for the society as whole at a much broader level. As prices rise, people cut down on the consumption of non-essentials. Due to high inflation people have had to spend more money on meeting daily expenditure. Food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down a little.
Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them.

This is reflected in the index of industrial production, which is a measure of the industrial activity within the country. Numbers released yesterday by the Central Statistics Office showed that for the month of July 2014, the index of industrial production grew by a minuscule 0.5% in comparison to July 2013. This was largely on account of a slowdown in manufacturing, which forms nearly three-fourths of the index of industrial production. It contracted by -1%. Many sectors within manufacturing like tobacco, apparels, paper and paper products, communication, publishing, furniture etc, contracted majorly.
This is worrying given that the expansion of the manufacturing sector remains India’s best bet to create jobs at a fast pace, for its semi-skilled workforce. And manufacturing cannot be turned around unless inflation is brought under control, so that consumer demand revives, and in turn encourages businesses to increase production of goods. Interestingly, August 2014 saw a major revival in car sales with sales going up by more than 15%.
Along with the index of industrial production, the Central Statistics Office also released the consumer price inflation number, yesterday. Inflation in August 2014 stood at 7.8%. This was a tad lower in comparison to the inflation in July 2014, which was at 7.96%. The inflation in July 2013 had stood at 9.52%.
While this is clearly good news, the worrying bit is that food inflation continues to remain high at 9.42%. In July 2014 the number had stood at 9.36%. In August last year, the number had stood at 11.11%. “In the case of food articles, price pressures were seen building up in pulses, condiments & spices and milk & milk products. Inflation in each of these categories has been rising for the last 3 months,” Crisil Research pointed out in a research note yesterday.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60%. If consumer demand is to be revived then food inflation needs to be brought under control.
Analysts believe that consumer price inflation will continue to fall in the months to come. A major reason for this is the fall in global oil prices. “A significant decline in petrol prices (Rs 5.4 per litre since July in Mumbai) due to lower crude oil prices globally, is also likely to have contributed to the downward price pressures in transport & communication. We expect this to continue going forward as no further hike in diesel prices is expected as long as crude oil prices stay at current levels,” Crisil Research points out.
On the flip side, a weak monsoon has led to the build up of “inflationary expectations” (or the expectations that consumers have of what future inflation is likely to be). And this could play a spoiler in reviving consumer demand.
In the long run, other than bringing down inflation the government needs to carry out structural reforms in order to revive Indian manufacturing. As Crisil Research points out “Incremental policy measures and bureaucratic improvements that the new government has taken in its first 100 days to improve the ease of doing business, has had a positive impact on business sentiments. However, it will take some time for these to translate into growth. While these are critical to lift growth in the short-term, the government needs to move forward with structural policy reforms such as implementation of GST (Goods and services tax), easing labour laws, rationalisation of fiscal subsidies, and amendment of land acquisition norms, to maintain the growth momentum beyond this year.” And that is easier said than done.

The article originally appeared on www.FirstBiz.com on Sep 13, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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