Why services inflation matters

The buzz around inflation usually centres around the soaring prices of veggies and dals but the heat is much greater from another quarter — services. Galloping costs of services such as healthcare, education and housing are hurting the Indian middle-class much more and finding a solution to this problem appears difficult. While the Centre is making some attempt to tame food inflation, little is being done to control services inflation, which now looks like a structural issue with the country’s changing demographics and capacity constraints.

In June, even as the overall CPI surged to a 22-month high of 5.7 per cent, the increase in the cost of many services was much higher. Inflation in cost of hospital and nursing home charges as captured by CPI stood at 8.26 per cent in June, up from 6.8 per cent last year. Similarly, housing cost, i.e., rental expenses, surged to 5.48 per cent, up from 4.49 per cent in the same period last year. The cost of repairs of residential buildings is also growing faster at 6.76 per cent, versus 5.57 per cent in 2015.

But the official numbers do not capture the entire, slightly worrying picture. In healthcare, for instance, the cost inflation is in double digits of 12-15 per cent which has, in recent years, pushed up the premium rates of health insurance policies sharply. In education, again, for professional courses at top institutes, the fee is rising at least at 10-12 per cent each year as captured by various surveys we have highlighted below.

One reason for the understated services inflation number could be that MOSPI gives more weight to public services that come at a subsidised cost, say economists. However, one thing that stands clear now is that when you plan for your retirement or your child’s education, you have to factor in higher services inflation. Else you might be left with a shortfall in your kitty.

There is bad news in store for couples scouring the city for a good school for their toddlers. The inflation devil is growing every year at over 10 per cent and without proper planning and budgeting it may be difficult to fund these children’s higher education.

A survey conducted last May by the Assocham Social Development Foundation on rising school expenses, which covered 1,600 working parents, showed that tuition fees and other expenses more than doubled in the last 10 years. The survey also revealed that over 70 per cent of parents spend 30-40 per cent of their take-home pay on their child’s education and the annual fees for regular schools were ₹65,000 to ₹1,25,000.

School education aside, the costs of professional and vocational education have also been shooting through the roof. At private institutions, the inflation in fees for under-graduate and post-graduate courses is in high double digits as there is no check on capitation fee. This is especially so if you want to get your child into the medical stream. The cost of an MBBS seat in private institutions in Tamil Nadu, for instance, is about ₹40-45 lakh — without adding the capitation fee. This was about ₹23-25 lakh four years ago. This translates into annual inflation of 10-15 per cent. Even students who get into government-aided institutions through merit have been feeling the pinch as the Centre has been revising tuition fees regularly. In April this year, the Ministry of Human Resources Development increased the tuition fees for under-graduation courses at IIT from ₹90,000 to ₹2 lakh a year. It was only in 2013 that the fee was hiked from ₹50,000 to ₹90,000; an annual increase of close to 60 per cent over the last three years.

Why?

Rising costs of building infrastructure and higher salaries of academic staff and trainers aside, what has stoked inflation in education cost is the increasing demand-supply gap.

And, given the limited funds that the Centre is able to spare in subsidising education and its excessive dependence on the private sector, inflation is only bound to be higher. The private unaided colleges set their own fees and are not mandated to limit the fees to the level set by the government. The National Sample Survey Office’s (NSSO) survey in 2014 (January-June) showed that about 60-70 per cent of students at the school level as well as in graduation were in private institutions.

The gross enrolment ratio (GER), which is the total enrolment expressed as a percentage of the eligible school-age population, stands at an alarmingly low level. At higher education level (18-23 years), for instance, GER is still only 21.1 (as of 2013-14), which is far lower compared to 26 per cent in China and 36 per cent in Brazil. At senior secondary level (16-17 years), the GER in India is 49.1.

A survey conducted by MHRD in 2012 showed that college density, which is the number of colleges per lakh of eligible population (in the age group of 18-23 years), was 6 in Bihar and 64 in Puducherry. The all-India average was 25. Of the total number of colleges, 58 per cent were private unaided and 15 per cent were private aided.

Outlook

The Centre aims to improve the gross enrolment ratio by increasing the number of institutions and their intake. But given the limitations on government spending on education due to tight fiscal situation and the country’s fast rising population, the supply-demand gap in education services might only widen in the coming years. From about 1.3 billion in 2015, India’s total population is projected by the United Nations to hit about 1.4 billion in 2022 and 1.5 billion by 2030.

 There will thus be a large unmet demand for higher education in the coming years and the middle class’ rising affordability will only push up costs further. A report from the British Council India in 2014 on the future of higher education in the country says the number of Indian households which will be able to pay fees for higher education will increase from 15 million to 25 million in the next 10 years.

According to the NSSO Survey, 2014, medical cost inflation was around 10-11 per cent in the 10 years between 2004 and 2014.  The average medical expenditure per hospitalisation increased from ₹8,851 to ₹24,436 in the same period. The survey noted that the average expenditure for treatment of cardio-vascular disorders was ₹43,262 in 2014 while treatment of cancer cost ₹78,050 and gastro-intestinal disorders cost ₹23,933 and those related to obstetric and neonatal made people pay ₹21,626.

However, inputs collected through various sources by  Business Line indicate that costs for various critical illnesses listed above are at least about 10-15 per cent higher now. In India, health insurance penetration is also low, so there is no respite from that end too. Data from IRDAI shows that the total number of people insured for healthcare expenses stood at 2,880 lakh in 2014-15 — that is, 22 per cent of the population; up only slightly from 2,535 lakh in 2010-11.

Why?

Increasing incidence of lifestyle diseases has seen demand for healthcare services rise in the country. The National Sample Survey Office’s survey in 2014 showed that the proportion of ailing person per 1,000 (in urban regions) stood at 118, up from 99 in 2004 and 54 in 1996.

But workforce and infrastructure in the healthcare system is scarce in India and has not been able to serve the increasing demand.

A recent WHO study based on census 2001 data revealed that there were only 80 doctors per lakh population in India compared to 130 in China. If only those with proper medical qualification are counted, the number for India falls down to an alarming 36 per lakh. Hospital bed density is 1.3 per 1,000 (as of 2010) as per a McKinsey report on healthcare, which is well below WHO guideline of 3.5 and global average of 2.6.

Further, in healthcare again, there is a large dependence on private sector which adds to cost. Data shows that about 70-80 per cent of the ailments are treated in private hospitals where the average cost of treatment is about 2-3 times higher in the case of most ailments.

Outlook

Medical cost inflation may only go up in the coming years.  As the 12{+t}{+h} five year plan highlights, with the country’s rising life expectancy, healthcare costs may only rise as more people become vulnerable to non-communicable diseases (cardiovascular diseases, diabetes, cancer and chronic respiratory diseases). United Nations projections show that the life expectancy at birth for India will rise from the current 67.5 years to 71.7 years by 2025-30 and 75.9 years by 2045-50. Further, as research and development in medical science brings more advanced treatments for critical illnesses, awareness of such procedures will only create more demand for them.

The inflation in housing costs in recent years has been mainly due to higher prices paid to the labour for repairs and maintenance. The residential rental market, however, has not been doing well and rentals have either fallen or stayed flat in most regions. The reason behind the sluggish trend is the surge in supply that happened between 2011 and 2013. Rental yield even in metros such as Mumbai is down from about 6 per cent in 2006 to about 3 per cent now, according to reports. However, for those planning to continue in rented houses in the next 5-10 years, it is safe to assume inflation in rental costs at about 8-10 per cent and plan accordingly.

Why?

Property rentals have not moved up much given the large supply in rental stocks. Experts also indicate corporate houses cutting costs on perks such as rentals given to employees as a reason for drop in demand and rates for rental accommodation.

Outlook

In the coming years, however, rentals of residential properties may also shoot up through the roof.

While it has taken about forty years (1971-2008) for India’s urban population to hit 230 million, the 12{+t}{+h} five year plan document from the Planning Commission says that it could take only half that time for the country to add the next 250 million. Data from Census 2011 suggests that about 10 million people are moving to Indian cities every year. This will give rise to a need for two million additional houses every year in the affordable segment, says a 2015 report on Indian Real Estate from KPMG. If development doesn’t happen in this space, the shortage of rental properties will make rentals go up. The increase in cost of land within city limits and higher construction costs may also push up rentals.

Talking to experts including JLL and PropEquity, we find that rentals in Mumbai, Pune, Hyderabad and Bengaluru may see an increase of 9-10 per cent over the next few years, as these are places where demand is outstripping supply. 

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