Inflation - a general rise in prices measured against a standard level of purchasing power. Economic Growth which is accompanied by tolerable rate of inflation is sustainable over time but high rate of inflation exacts heavy toll both on economy & society.
Recently Finance Minister P.Chidambaram said “At 6% inflation, the government’s boat starts to rock; at over 8%, there can be blood on the streets”. Inflation at 6.73% is of major concern for Government, RBI and of course for “Aam Aadmi.”
The Inflation based on (Wholesale price Index) stood at 3.81 per cent a year ago reached to an 2 year high of 6.12% & to an another high of 6.58% reached a peak of 6.73%, the way above the RBI's projection of 5-5.5 per cent for the year despite several measures taken by the RBI. If we consider CPI (Consumer Price Index), Price at which end consumer pay is at 9.68% with no signals of letting up.
The Primary Articles group mainly non-vegetarian food articles shot up 12.26 per cent year-on-year which has a weightage of 22% in Inflation, prices of pulses over 26 per cent. Fruits and vegetable prices were up 19 per cent, with prices of onions up 82 per cent. The heavyweight manufactured products group with weightage of 63.8% was up 6.37 per cent from mere 1.9% a year ago, with metals and metal product prices shooting up nearly 17 per cent.
Theory on “INFLATION” states that there are 3 major types of Inflation (“Triangle Model”) Demand Pull Inflation, Cost Push Inflation, Built-in Inflation (it is linked to “Price-wage spiral” as a part of "vicious circle”) Also various economists states that inflation occurs due to money supply but, In contrast Keynesian theory suggest that aggregate demand determines the inflation rather than money supply & money supply is only one determinant of aggregate demand. Also relationship between inflation and unemployment, is explained in so called the “Phillips curve”
Analyst believes that the Rise in level of Inflation was mainly due to supply constraints of essential commodities. But there are other factors also like future trading in agricultural commodities by hoarder, Increase in cement & metal led to increase in construction cost. Also high money and credit growth, elevated asset prices, strains on capacity utilisation, wage pressures and widening of the trade deficit. Headline inflation (inflation relative to income growth that determines whether a household’s standard of living is rising or falling) has been moderating mainly on account of the decline in international crude prices & core inflation (total excluding food and energy prices & it is less volatile and a better reflection of the interplay of supply and demand in domestic product markets) has remained firm and is likely to shape inflation expectations.
Monetary: On 17th February 2007, China has raised CRR from 9.5% to 10% for the fifth time in eight months to rein in inflation and cool investment in the world's fastest-growing economy. RBI raised the Repo Rate & Reverse Repo Rate & CRR (Cash Reserve Ratio - money kept aside by banks with RBI) to control Inflation. Recently RBI increased repo rate to four year high of 7.50% against 7% & Repo rate to 6%. Inflation didn’t cooled down much, therefore RBI took bold step by increasing CRR to 6% (In Two Stage: 17/02/2007-5.75% & 03/03/2007-6%) from 5.5% as this move will absorb Rs.14000 crore from Banking system. RBI has tightened the provisioning requirements for banks' exposure to real estate, capital markets and consumer loans to cool down the credit growth. Banks has passed on this burden by increasing PLR (Prime Lending Rate) & Interest rate on Loan. Credits off take during this period were growing at 30%. This action hurts the credit growth of booming housing & consumer products. People are discouraged to take loans & also loans taken at floating rate are getting hurt. SME’s (Small & Medium Enterprise) are also hurted as they depend largely upon domestic debt & expansion plan may stopped to a certain extent, also employment generation may reduce. CRR hike, for some bond house has wiped out their last 10 months earnings after completed two sets of government bond auction. People having fixed income like pensioners are worst affected due to higher price, their standard of living has decreased. Rising Inflation also hurted the domestic saving adversely as household realized that value of their money being eroded. This situation will worse India’s external problem like BoP (Balance of Payment), High rate of inflation in India vis-à-vis it’s trading partner given a fixed or near fixed nominal exchange rate results in currency becoming overvalued with adverse consequences on it’s BoT (Balance of Trade) Eg, IT & ITES services. This hike is seen more as a measure to control the inflationary expectations rather current inflation. As any monetary intervention by the RBI to control inflation usually takes time to take effect.
The RBI can be expected to go in for another round of rate hikes in April as monetary policy authorities all over the world over are expressing similar sentiments in terms of an uncertain outlook, concerns about persistent underlying inflation and some nervousness about financial volatility. Several central banks have tended to tighten monetary policy, even at relatively low current inflation rates so RBI’s move to control is reasonable. Recently, Nobel laureate mathematician John Forbes Nash says inflation could be controlled more effectively if major global currencies collectively adopt the same target rate. Rakesh Mohan, former RBI governor said “With Sound monetary policy, closest approximation of potential growth must be identified in terms of a rate of growth which is associated with non-accelerating inflation.”
Fiscal: As usual, Politics always wins over the Economics, The UPA (United Progressive Alliance) Government has started to look in to this matter seriously as Election Process will take place in key states like Punjab, Haryana & Uttaranchal & crucial polls in Uttar Pradesh are round the corner as there campaign of being with “Aam Janta.” In 1998, BJP party met with severe setback in Delhi election due to spiraling price of Onions. Prime Minister Dr. Manmohan Singh has set up a monitoring committee headed by cabinet secretary to keep check on rising price & members from various heads like Food & metal are asked provides details & explanation for sudden rise in prices. Few days back Chidambaram informed the Companies at FICCI meeting that Industry should not take undue advantage of booming economy by increasing price & unnecessary rise in price will hurt them back & also harm the economic growth.
Government has taken several other measures also to control the inflation. Government has reduced the fuel prices(Rs.2 on Petrol & Rs.1 on Diesel). This move is expected to reduce chain reaction in the supply chain by cooling off prices of commodities when basket price for crude in India is at around 55$ per barrel against peak of 75$ in august 06.In view of the rising inflation political parties, especially UPA partners demanding ban on future trading in agricultural commodities Centre has now banned the future trading in tur & urad. The Centre has completely banned export of wheat & made 365000 tonnes to sell in open market & allowed free import of maize. Centre has urged to make PDS (Public Distribution System) to be more effective & sound buffer zone to control the inflation in effective manner. As kamal nath said, “Government has become flexible to cut peak import & custom duty on primary goods & has become more liberal in imports to bring down the prices.” Some analysts has suggested the entry of big retailers like Wal-Mart which helps to control the price & cover most part of the country, it has helped the US to control the inflation over the last decade.
Because of Fiscal & monetary measures, Inflation Rate fell marginally to 6.63% from high of 6.73% during previous week. Economists are of the view that Fiscal measures had more impact than monetary measures which helped in bringing primary articles group to 10.7% from 12.26%. But Chidambaram said, "Our repeated goal is to ensure that the inflation rate moderates towards 4 per cent. It will require a mix of monetary and fiscal steps.” Inflation in India remains much lower than in many other developing countries. But currently price have doubled in competition with fastest growing Chinese economy.
“Inflation is big Concern”. SENSEX on 23rd of February was down by 389 points wiping out Rs 1.17lakh Crore. Market expects Government to take tough measures in coming budget to control the high Inflation & expects further hike in Interest rate. In India, it is recognized that inflation is a tax on the poor against which there are no hedges available. It is big question whether UPA government with current inflation level of 6.63% & promise of 9% growth in GDP, making all section of society happier especially “Aam Aadmi” will be able to achieve a target of 4% ?
Date : 25/02/2007
