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Inflation and the Indian dream

12 Sep

For a long time now, India has taken pride in being largely insulated from the global economic slowdown. True, Indian exports suffered, but it was also an opportunity for the exporters, especially software firms to diversify into markets other than the north american markets. India Inc was still hiring during the worst of the crisis. The Reserve Bank of India had a broad smile as the merit of years of regulation of the financial markets once thought of as unnecessary chaining of the economy was now vindicated. There wouldn’t be a sub-prime type crisis in India, despite exposures to North American markets India was still strong. Growth would not be badly affected. Then came news of the European slowdown and suddenly nobody was too sure anymore, India wasn’t going to stay immune to the global slowdown forever.
Indian growth is now at 7.7 percent. On an absolute scale a wonderful number, but not enough for the young nation to grow out of poverty. The RBI is not optimisitic.

However, can we blame the Indian slow down on international markets ? No doubt international effects are being felt in India, but it would be very dangerous to brush aside serious defects in the home economy by pointing the finger at the outside world. For one, Indian exports have been gaining momentum despite these slowdowns. New markets are being found in West Asia, Africa and South America. What is the problem then ? The answer is Inflation.
No, The RBI is not printing a lot of cash to fund government expenditure, infact the opposite is happeneing, monetary policy being followed is pretty tight. Where does the problem lie then ?
Maybe the traditional women of India who still do the bulk of the cooking will have an answer before the ones who meddle about with economics. The prices of commodities are increasing. India is suffering from severe supply side bottle necks. We must realize that despite everything that happened from the 1990s, India still has a large agrarian economy. A media or a middle class that ignores this fact doesn’t make it go away. The manufacturing sector too is ignored while focusing on the services boom. Growth has been dull in both these sectors. Food prices keep increasing, especially basic vegetables most used by the Indian middle class. India needs to wake up to the harsh reality that so much of its economy directly depends on the monsoons! Structural reform in agriculture and also manufacturing is what is required. Tighter monetary policy is what we get.
All economists agree that in the long run money is not a part of the real economy. Agreed short term monetary policy is essential, but what is the use if we do not combine it with a long run vision of improving the underlying problem ?
Demand is another key issue, demand has been increasing in India ever since the middle class got richer. This includes the demand for food. More Indians eat out today than ever before. Rising tomato prices havent stopped Bangalore from having a Tomatina of its own. Population doesn’t decrease either, neither does agricultural land increase. Monetary policy is not magic to solve a long term issue though it may ameliorate the temporary warning signals.
Bangalore needs to realize its a part of India, fed by Indian farmers.
I am totally for a booming service sector, but keeping in mind what is needed in the ground level to sustain it.

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4 Comments

Posted by on September 12, 2011 in Economics

 

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4 responses to “Inflation and the Indian dream

  1. USid

    September 12, 2011 at 3:16 pm

    Would if great if you could link to some data as well. Just saying, for credibility’s sake 🙂

     
    • madbullspeaks

      September 12, 2011 at 6:45 pm

      yep, you are right.. will do it in a while
      thanks !

       
  2. Avadhani

    September 28, 2011 at 2:34 am

    I wish I had more concrete means to convey my idea, but I don’t have the time to look it up…… 😀

    The problems you mentioned about supply side bottle necks while correct overall need to be more specific because they aren’t due to a lack of productivity. India in reality produces a lot more than we consume. The problem is the lack of a seamless system of distribution and utter dependence on – oil.

    Taking up the first problem, this has been widely brought out before – The lack of godowns in India to store food is resulting in lakhs of tons of grain being destroyed as it is left to rot outside. The result, farmers producing grain that never actually reaches consumers/gets sold. Excerpt from an article: “India has godowns to store 16 million tones when it needs almost three times that. What that means is wastage in these times of shortage. The total storage capacity is 28 million tonnes .. this leads to losses of 10 – 15%. Translate this into value… that is 6 million tonnes of grains damaged, unfit for human consumption … it amounts to Rs 8,000 to Rs 10,000 crores annually. ”

    Putting the staple food food storage problem aside, the other commodities are sold and brought through a nexus of rich and powerful middlemen. They create artificial shortages in markets and therefore increase prices. Nothing fuels fear like fear. Obviously, the returns never precipitate back to the farmers, but you get the point. Obviously, I am stating this in very simple terms, but the reality is a lot grimmer.

    Secondly, the dependance on oil is huge. The ruppee value can fall as low as possible which in turn can make the exports go as high as possible, but there is one inescapable truth and that is our utter dependence on oil, which I believe constitutes the largest part of our imports. As oil is pegged against the dollar, there is little or any control if the dollar inflow in to the country is stemmed due to lack of investments. Oil controls everything. It has been great so far that the prices of gas and petrol had been regulated, but with the oil industry reeling under the depreciation of ruppee and the rising need of oil and the ever increasing debt accumulated through loans, they can only survive by passing on the costs to the end consumers. This in turn will hit everyone as food has to be transported through trucks, trains and buses, which again run on diesel and oil and thus that results in a rise in their overall price of operation and……well, it sort of completes the circle.

    So while, the second problem can hardly be controlled by the government, seeing as our need is clear and is to stay for the near future, the first one can be greatly remedied. The answer is obviously, one we have heard soooooooooo often…….., improve infrastructure, formulate a better distribution plan, get rid of the business nexuses controlling the markets…………and ……. fight corruption! 🙂

    Being the ‘economist’ you are, I do hope, I haven’t made a fool of myself by disagreeing with you ….. only to agree :). I do wish to hear what you have to say.

     
  3. madbull

    October 1, 2011 at 1:25 am

    Hey Avadhani !
    Thanks a lot for stopping by at my blog.
    I actually don’t think we disagree on much, I know I did not talk much about the oil price problem because largely it is not under national control though obviously there are arguments to be made on reduction of our oil dependence/better pricing structure etc. Which is why I focused on the real economy problems which are much more within the grasp of our government.
    Ultimately I think we are both saying the same thing that playing around with the money supply is not going to help real problems go away. What we need is investment in sectors that matter.
    I am no ‘economist’ by the way 😛 just an amateur who trying to keep the interest alive through a blog! As you can see, we are both pretty much saying the same thing 😀

     

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