Saturday, April 30, 2011


Despite great optimism of Government of India for achieving country’s 8.5% growth rates it is now apparent that it would be an impossible target to achieve. Many professional economists, including foreign banks, feel that the growth rate will rather come down to 8%. as inflation and high cost of borrowing would impact production. The finance Minister’s expectation of 9% growth, within three years, would remain a futile dream. We feel, as the inflation would remain the dominant force during this period. India is in trouble. It is facing the highest non-food inflation in two months. Professional Economist now recommends that Government should build up strategic stockpiles of staples to cool prices, in medium term. Warren Buffet replying to journalist in India told that the present problem of world, including India, is not liquidity or the functioning of markets and capitals. It is the inflation that may constraint growth for a while. But ultimately inflation is bound to go down and growth would take place as productivity increases. The growth is bound to take place but may not be in a hurry, he added.

The Governor of RBI, D. Subba Rao has categorically stated that monetary policy is not that effective when it comes to inflation driven by supply side factors as is evident at present. The upper echelon of secretaries and officials has deliberated very recently to control the supply side of inflationary pressure. They felt that the inflation could be controlled through three ways. Firstly , through monetary measures, secondly, by bringing down deficit financing on one hand and, thirdly, by improving supply side either by increased production or by rationalizing supply line.

The Government is convinced that RBI has taken enough monetary measures already and now is the time for administration to improve the supply side of goods and services. The chief Economic Advisor of government of India feels that inflation has started coming down and in another six months it would reflect his optimism in practice. But most economist feel that inflation is not going to come down before 2012 and even the economic growth would not be more than 8% despite high hope of the Finance Minster and his team. While current inflation levels certainly need to be brought down, this year’s Economic Survey has a radical suggestion – inflation may be here to stay with us if we want a high-growth economy. Using crude instruments to bring down inflation could have unpalatable consequences – such as loss of output and jobs, factories closing down and farms becoming less productive. If that is the case, rather than curbing inflation radically, an alternate course would be to work out ways of shielding the poor from the effects of inflation.

The Economist of HSBC bank feel inflation n India is not going to come down in a hurry. India shall have to depend on import of crude oil. The value of crude is not going to come down soon. Neither corruption of the society is going to evaporate overnight. The lethal combination of these two components would force the country to pass through a great inflationary pressure. The growth story is intact but with moderation. According to private professional economists the economic growth rate of the country is not going above 8% till 2012.

. India, the second-biggest grower of rice, wheat and sugar, may buy some supplies from overseas, boosting prices of commodities including palm and soybean oils. Inflation is a casualty of high vegetable prices and the government may need to import some essential commodities to cool costs The buffer stocks created should be rotated regularly or else we’ll be doing more harm to prices. Today, we have no hesitation to recommend starting of retail movement through local corporate with foreign participation like in case of Insurance management. India does not have expertise on retail distribution system. The system can be developed with foreign participation.

Given extreme weather patterns across the globe -- floods in Australia, snowstorms in the northern hemisphere and turmoil in middle east and Africa beside natural caloaminit3s of Japan -- price rises could persist in the coming months. This poses upside risks to our inflation forecasts.

. Kaushik Basu said that India is a huge country in terms of population and land area. It is utter mistake to think that it is fully within the control of the government to move prices of food up and down. Despite our high regards for Mr. Basu we do not agree with these arguments. China is a bigger country than India with greater population .How China is controlling food prices? China is controlling through long term planning of stock piling and eradicating corruption and by managing public distribution system with greater vigilance. This is where Indian politician cum administrators failed.

Palm oil, which accounts for 80 percent of India’s annual cooking oil imports worth $8.4 billion, have surged 57 percent in the past six months in Malaysia, while soybean oil climbed 43 percent in 2010 for a second straight year, because of adverse weather in the producing nations. Did Government of India ever thought of stock piling these products knowing well that onion could be avoided but for Indian kitchen cooking oil is a must.

Reserve Bank of India Governor Duvvuri Subbarao has raised interest rates Eight times in a year, the most by any central bank in Asia. Monetary action alone won’t help cool inflation.

Basu, however, cautioned against using any blunt instrument like arbitrary fixing of prices to tame exceptionally high prices, as such a move results in shortage of commodities and retard growth. We are entirely in agreement with Basu. But let the first stop be taken locally to control unscrupulous traders and hoarder and cartel of fish market at least for Assam and vegetable cartel in Delhi and west Bengal. Unless oil prices stabilize and international situation in Japan ,Africa and Middle east improve lurking fear of inflation would be there and growth rate would be dependent on these factors indirectly.

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