So the prognosis is we’re heading for double-digit inflation, if we’re not already there – considering it’s the WPI as opposed to the CPI we’re talking about, and the fact that the oil price hike effect has not been factored in. This means a negative rate of return already for many small savers and a double whammy for many of us, given oil’s relentless northwards climb – and the fact that it constitutes 30% of our import bill – and the fact that if food-grains have to be imported, we’re impacted by both higher prices and a falling rupee. (The Sensex, off a whopping 25%, means the dollars are not flowing in as easily….another problem for the rupee)
It’s the classic inflation versus growth scenario, and frankly, no one has a clue about what to do. The RBI went and raised the repo rate 25 bps, to 8%, but one is not sure if (a) that’s enough and (b) if it’s an effective tool. Inflation in our case is primarily because of supply side problems and demand outstripping supply. What can anyone do in these circumstances? There are enough structural weaknesses still in the Indian economy to prevent this being fixed in a hurry, so supply-side constraints will remain. And how do you curtail demand, particularly for primary items and oil? Do people eat less? Do we use less oil? Easy to say yes, but that’s a load of crock. It’s not as if most Indians are an overfed lot. And there isn’t really any public transport in India. So what is anyone going to do? There are no easy solutions in life. If the problem is inadequate supply and there are bottlenecks to ensure that supply cannot keep pace, then the equilibrating mechanism of a price rice will ensure demand cools off. Trouble is, try explaining this to families that can’t afford to buy sugar, or wheat/rice, or greens for their kids. There will be political and social repercussions and let’s not forget it’s an election year. If fuel prices were actually benchmarked internationally, a good many people would be forced to stop using two-wheelers and cars. Do they have an alternative?
The markets are beginning to factor in another rate increase (probably coupled with a CRR hike) by the RBI, as evident from falling bond prices. So it’s clear the government and the RBI have decided to kill inflation at the expense of growth. I’m just not sure they have the right weapons in their armoury, or if anything can be done. And any solution like this is sure to increase the fiscal deficit, which is already burdened by subsidies, oil bonds, loan write-offs and the pay-commission recommendations. Lower growth will also mean lower revenue collections for the government. So we’re looking at inflation not really being tamed, a deceleration in growth and a burgeoning fiscal deficit. In other words, we’re fucked.
I love spreading good cheer.