Why in news?
There is a growing consensus across the world that corporate turns crisis into an opportunity for businesses to make supernormal profits.
How inflation is contained in an economy?
- Inflation - It is the rate of increase in prices over a given period of time.
- There are two main ways in which inflation happens.
- Cost-push inflation - Prices get pushed up because input costs have risen.
- Demand-pull inflation - Prices are pulled up because there is excess demand.
- Containing inflation - Central banks use monetary policy to contain the inflation.
- It raise interest rates to bring overall demand in line with overall supply containing demand-pull inflation.
- It raise interest rates to contain demand which in turn contains cost-push inflation.
- In case of Greedflation, the whole monetary policy prescription becomes more unjust and ineffective.
- Because it is neither due to higher input cost nor due to excess demand.
What is Greedflation?
- Greedflation is the exploitation of inflation by corporates to create excessive profits.
- It simply means (corporate) greed fuelled inflation.
- In normal inflation situation, corporates go for the wage-price spiral, in Greedflation corporates choose the profit-price spiral.
- Wage-price spiral - A cyclical condition where the rise in wages leads to increased prices, resulting in inflation.
- Profit-price spiral - Companies exploit the existing inflation by putting up their prices way beyond just covering their increased costs.
- This is used to maximise their profit margins that, in turn, further fuelled inflation.
- Greedflation happens in two scenarios.
- When the price mark-up is far in excess of the increase in inputs.
- When businesses do not bring down the market prices even when the input prices fall.
What are the implications of greedflation?
- Less likeliness to spend money will lead to reduced economic activity.
- Reduces the purchasing power of the people making even basic needs hard to afford.
- Creates social unrest due to raising cost of living.
- On the corporates’ side it affects the business as well as loss of customer trust.
- Forces governments to intervene like windfall tax to contain inflation.
Is Greedflation happening in India?
According to the Centre for Monitoring Indian Economy (CMIE), ‘60% of the growth in net profit can be attributed entirely to the increase in profit margin.’
- Net profits of 4,293 listed companies reached Rs.2.9 trillion in the March 2023 quarter.
- This spike in profits is over 3.5 times the average quarterly profit earned by listed companies till before the pandemic of 2020.
- The data shows the Indian corporate sector has generated superlative profits in the post pandemic period.
- The sharp spike in profits depicts there is a very good chance that corporate greed also played a role in spike the inflation rate in India.
References
The Indian Express | What is Greedflation? Does India also have it?
