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Greedflation

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June 28, 2023

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.’

greedflation

  • 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?

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