The people of India continue to grapple with a back-breaking inflationary trend that the government at the centre has failed to understand, acknowledge and control
On the concluding day of the G20 summit at Cannes, Prime Minister Dr. Manmohan Singh deemed it fit to talk in defence of a major UPA II failure. Without bothering to explain the reasons behind persistent inflationary pressures, Dr. Singh noted that inflation was a reflection of demand for food items such as fruits and vegetables exceeding supply and, therefore, “to some extent, at least, (it) is a sign of growing prosperity of our country”. Finance minister Pranab Mukherjee, who on many occasions has rescued the Congress party from its worst crises, was quick to reiterate the argument. What is most clearly evident from these remarks is that the government of the day refuses to acknowledge this as a problem and the now common contention that the Congress is losing touch with the common man somewhat holds true.
As per the data on weekly food inflation measured by Wholesale Price Index (WPI), prices of vegetables increased by 29%, milk surged by 12% and egg, meat & fish prices increased by 13% (week ended October 22). Although India is one of the largest milk producers, it faces shortage of milk due to increased demand. India’s overall food inflation for the week surged to 12.21% from 11.43% in the previous week. Rise in petrol prices has only added to the woes.
Experts have suggested on many occasions that inflation is not just a result of a sudden shock (as the government continues to argue) such as a rise in food prices because of inadequate rainfall or a jump in fuel prices because the monetary easing in the West has sent a wave of liquidity into commodity markets. There are structural factors at play as well, which cannot be tackled with higher interest rates alone. This puts RBI in a spot. It cannot be a spectator as inflation expectations cut loose and it cannot tackle the underlying factors with its policy kit either. Since March 2010, the RBI has hiked its key policy rates 13 times, totalling 350 basis points, to tame demand and curb inflation. The rate of price rise has been above the 9% mark since December 2010. At its second quarterly review of credit policy last month, RBI projected inflation to moderate from December onwards and touch 7% by the end of the financial year. But it seems to largely be in vain. According to Anis Chakravarty, Director at Deloitte, headline inflation has remained above the 9.5% mark despite the steps taken by the RBI. “If you look at recent months, inflation is moving to 9.7%, which raises a large question on all the monetary policy steps, which the RBI has undertaken starting from January, then by raising rates by 25 basis points in March, then in May by 50 basis points, again by 25, then in August by 50 and so on & so forth till September,” he tells B&E.
As per the data on weekly food inflation measured by Wholesale Price Index (WPI), prices of vegetables increased by 29%, milk surged by 12% and egg, meat & fish prices increased by 13% (week ended October 22). Although India is one of the largest milk producers, it faces shortage of milk due to increased demand. India’s overall food inflation for the week surged to 12.21% from 11.43% in the previous week. Rise in petrol prices has only added to the woes.
Experts have suggested on many occasions that inflation is not just a result of a sudden shock (as the government continues to argue) such as a rise in food prices because of inadequate rainfall or a jump in fuel prices because the monetary easing in the West has sent a wave of liquidity into commodity markets. There are structural factors at play as well, which cannot be tackled with higher interest rates alone. This puts RBI in a spot. It cannot be a spectator as inflation expectations cut loose and it cannot tackle the underlying factors with its policy kit either. Since March 2010, the RBI has hiked its key policy rates 13 times, totalling 350 basis points, to tame demand and curb inflation. The rate of price rise has been above the 9% mark since December 2010. At its second quarterly review of credit policy last month, RBI projected inflation to moderate from December onwards and touch 7% by the end of the financial year. But it seems to largely be in vain. According to Anis Chakravarty, Director at Deloitte, headline inflation has remained above the 9.5% mark despite the steps taken by the RBI. “If you look at recent months, inflation is moving to 9.7%, which raises a large question on all the monetary policy steps, which the RBI has undertaken starting from January, then by raising rates by 25 basis points in March, then in May by 50 basis points, again by 25, then in August by 50 and so on & so forth till September,” he tells B&E.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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Management Guru Arindam Chaudhuri
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
PM's Management Consulting Arm-Planman Consulting
