India’s Theme For 2011-12: Inflation

Posted on May 28, 2011 in Biz and Eco

By Ashik Gosaliya:

“Inflation”, no other economical theme I could have justifiably denoted to the year 2011-12. The mainstream economics defines the word “inflation” as a general rise in prices measured against a standard level of purchasing power. By and large, it is understood that inflation is caused by the correlation of the supply of money with output and interest rates.

Two different worlds are having two different trends but one single problem: Inflation. It is learnt that people’s perception about global economic scenario hasn’t changed much. Developed economies are still careworn with sustainable job environment deficit, when emerging global powers are marred with high price rise and high interest rates. While the advanced economies have been struggling to create growth and jobs and fight deflation, the new world economies are struggling with the negative spin-off effects of rapid growth and strong domestic demand, and are fighting rising inflation.

Indian economy and Inflation:

Hide and seek is the name of the game when it comes to inflation in India in the past two years. In India, inflation has become smart political excuse to high growth, which neither seems high nor steady. Certainly, we can’t argue against the fact that global issues have made their contribution to add to the woes, Indian economy has been facing, however, sudden outbreak of scams, fresh highs of corruption level and lack of policy reforms from the UPA government for faster economic growth have caused inexplicable consequences on Indian growth mechanism as well as budget of an individual.

Despite high inflation and colossal corruption patterns, India overcame the reparation done by global recession with little slower growth rate. When India touched double digit growth, Indian enthusiasts have started writing China off, comparing it to Indian growth and started painting stories of India over passing China by 2020. Reality is not that transparent. India has high inflation rate of around 9 per cent and consumer price Index (CPI) is currently flashing at more than 10 per cent. Prices of onions, vegetables and other staples are rising even faster. The latest data of the government food price index shows they jumped almost 17% last financial year. Situation on dining table has changed; food is eating people in India instead of people eating food. Moreover, consistent rise in government borrowings and high purchasing power have added fuel to the fire.

Indian Inflation Factors:

Notwithstanding high growth of 8 percent, recent analytical opinions suggest that India is heading towards a difficult time. Two political excuses are making most of the knock into the pocket of common men. For a longer period of time Finance Ministry remained hopeful of controlling high price rise within six months (Pranab Mukherjee never pronounced which six months he is referring to). Indian government suddenly woke up to the 16-18% price rise with an excuse that “Inflation remains moderately high in growing economy”. When that argument was countered by economists on technical grounds, government came with another excuse of global price rise and burning crude oil prices. Well! That is quite a valid excuse but not enough to erase policy level deficiencies.

Economy pundits blame India for its high food price cutting into budget of people. It’s not possible for any nation to de-hyphenate its economy from political events. Political developments are enough to equate the real interest rate either high or low. Inflation, interest rates, fiscal deficit, current account deficit and depreciation of local currency could be the reason for slowing down the economic growth. RBI is worried about these things, which have virtually hampered the dream level of economic growth. Loose budgets over a period of years, easy money availability with uninspiring approach towards much-needed deregulations and investments have created a tailback that generated inefficiencies and push up prices.

Macro economical factors:

Nope, it doesn’t mean that as an economy India is giving any negative vision to its people. I would like to repeat the famous words of ex-Finance Minister, P. Chidambaram, “Our fundamentals are strong”. Yes, they do and won’t let India break down. But we are aware of what significance political assurances hold in real economical crisis. There are strong macro economical fault lines that need to be observed closely. They clasp potential to cut the economic outlook to certain extent and will keep foreign investments away from the economy i.e. scorching level of public debt. Rise in government spending and widening of fiscal deficit would jeopardize the economic growth.

India’s public debt zoomed to more than 76 per cent of the total GDP, which is much higher than ever expected. It has increased with the speed of 10 plus percent since 2007. Another concern is capital deficit. Current account deficit is expected to inflate further supported by depreciation of Indian Rupee (due to high inflation and interest rates) will make imports dearer and India’s largest import product is crude, higher crude oil prices as projected and lower expectations of foreign capital inflows will dent foreign investment environment.

Quick Fix:

There can’t be any quick fix to long running troubles India has been facing. Government needs to adopt systematical economical reforms in various sectors like Infrastructure, education, health and public distribution system. It is challenge on part of the government to bring down the inflation at the rate where it can refrain from giving excuses.

Since Indian government has already committed to invest up to $1 trillion in infrastructure, however to attract FDI and to transform itself into best investment destination, India need to keep up the momentum, infrastructure development needs to step up moderately. Sectors like health, agriculture, food processing, education and entrepreneurism need big boost from the government.

Final Words:

In more than one way Indian economy is great learning lesson for the world. Growth, if solves some, creates some other problems. There is reason to be hopeful as what is required — strict fiscal policy and tight interest rates — the central bank of India is exactly moving into the same direction. Since last year RBI has increased policy rates by 9 times and now it is ready to compromise short term growth to control this maniac for the long term sustainable growth. While I was writing this, two contradictory statements came to my notice. “Inflation pressure to continue.” “Inflation seen below 8 % if monsoon good”.

The writer is a Correspondent of Youth Ki Awaaz and also blogs at ashikgosaliya.in.

Img: http://beyondheadlines.in/2011/03/food-inflation-in-india-decreases-to-10-39-percent/

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ABHIJEET CHATTERJEE

Coming straight to the issue of raising Inflation in India & its control so far what ever attempt were taken are not showing the sign of softening in inflation, Presenting my view RBI should have taken all necessary measure of rising the interest rate quite earlier & that too rising it significantly. my points are.

1. For every action there is equal & opposite reaction, in normal scenario Inflation & Interest rate should move in opposite direction which is not happening, Inflation & Interest rate is a question of appetite & bit sentimental in its nature, if interest rate increased very little & very slowly it is actually giving room to inflation by getting digested & accepted in the market,( it can be understood as with every little increase in interest rate considering it as not much disturbing yet), it is just because since the increase in interest rate was so little & slow it does not look repulsive to the Market at any point. what RBI has done is the same it has gradually increased the appetite of the market to digest higher interest rate and higher inflation rather making sentiment of the market repulsive & yet unable to achieved its objective of restricting Inflation, answer to this is very simple even poison taken in very little quantity get digested.

2. My second point (For Retail market) would be= If an economy continue to remain in a inflationary environment for prolonged period, market forget about the initial price from where it has started the inflationary rally & since a new price started getting discovered in the market which thereafter started getting accepted in the market by enhancing its appetite price continue to grow and every increase in price seems to be fairly priced, demand increase as it may further grow this chain reaction continue & price keeps on rising, every product available in the market is not interest rate sensitive eg FMCG, LIVE STOCK, VEGGIES etc. In lower label these business are more on cash driven than credit driven. in inflationary condition these day to day needs increase there price but with increase in the interest rate it never come down, the question is why a Retailer will bring down price & sacrifice his profit which he able to make today due to inflation, Knowingly that the Market has increased its appetite for increased price rate & able to purchase it at a higher price. even increase in supply cannot bring it down, supply side can be increased by increasing production and stored in the warehouse but that does not necessarily mean that retailer will follow the rule of demand and supply & reduce per unit profit margin & increase his sale volume to maintain there profit rather the tendency would be to sale more volume at a higher price to make more profit & store the excess available in the market for future price hike, Apart from that since for every retailer there area, mass, client are almost specified increase in volume is not often possible, so they do not compromise on price, Repeat- profit can be maintained either way a) By lowering margin per unit & increase in volume of sale which is often not practiced by retailer due to almost fix client base as well as there is limited storage capacity for them the only possible scope to maintain profit is by increasing per unit profit margin what they do in the name of inflation, as & when it happens, It can only be checked in very first leg when price is moving towards inflation.

3. My third point is towards commodity exchange, these exchanges are made to protect the interest of Producer & Procurer of commodity, 90% of transaction’s are done by Individual investor in investment mentality which means end user is not using it ,neither they are producer nor they are procurer of commodity they invest for profit motive as they invest in share market, why they are allowed to get registered when they have nothing to do with commodity & are just a consumer, the purpose for which these exchange are made can only be met only if like mind set people are allowed to participate else it is inflating the price. these exchange is giving scope of gambling rather serving the purpose for which they are made, One should not be confused these exchange with stock exchanges, volatility in share price will not effect a common man if he has not invested in it but volatility in commodity price do effect. In Race to become more efficient & profitable exchange than NSE & BSE these MCX & NCDEX forget the purpose for which they made.

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