Looming inflation or overheating!! who is getting it right??

“Government would act strongly against companies not controlling prices”, sounds like a statement made in a pre-liberalization era against erring money lenders. Make no mistakes, these are the sentiments echoed by our own finance minister who is well acclaimed for pro growth polices, making attempts to control the prices

For a moment let’s overlook the retrograde statements and look at the broader picture. The question is, how critical the inflation is or whether its the real culprit?

Look at the inflation picture in India, the data is as presented on a year on year basis. It’s a common understanding that commodity prices are subject to seasonal vagaries. This suggests that the YOY inflation published would be seasonally adjusted to throw a right picture. However the same is not taken cognizance of & the high inflation rate that we see now is actually a past

During April’06- Aug’06, crude prices mostly remained above $70 and globally wheat prices surged by more than 26% around Oct’2006. The impact of these supply shocks can be seen in week on week inflation however that is not what is shown. The low base of 52 weeks back index has resulted in higher yoy inflation number in recent months. The problem that appears now is actually got over few months back

Given the benign crude prices & already factored in grain prices, inflation would adjust automatically by May onwards & this all would happen without government taking any measures on price control. So all measures announced by government are keeping an eye over elections and later pat its back & get the credit

Given the government besotted with the inflation number, crazy actions may create more trouble. Wrong messages go to the industry and confidence gets shaken. Lot would depend on the expected supply of grains in coming months and monsoon picture. Moreover, any trouble in Gulf can also shake the oil supplies

The time is for monetary measures & RBI needs to take appropriate measure to balance the growth and stability of prices. However, the same seems to be missing from the scene. Continuous monetary measures taken in recent past were inadequate to control the rapid growth that might not be sustainable. It would be appropriate for RBI to take right measure and give clear path to the economy. The need is of a long term policy direction and sense of urgency, before the delayed action kills the growth

Emerging India: Is it sustainable?

Stock market tumbled to 3600 levels from 4,200 a fortnight ago. Nearly 15% wiped off & analysts are once again out with the laundry List of excuses. To table a few: (1) Pro electoral budget is back & the industry was not ready to face any such measure by FM at this juncture, (2) Inflation is a concern and high interest rates are a big dampener for growth (3) & a whimper global alibi, its the yen carry getting unwound and FIIs funds are getting withdrawn

As a practice lets get back to dissection table:
NIFTY moved from 2600 levels to 4200 in less than 12 months time frame, a whopping 70% jump. Given NIFTY the barometer of economy and supposedly a bellwether index, the growth needs to be in sync with economy. Even economy manages to grow at double digit for five years; does this justify the rise in index?
Lots said about India, an emerging market and growth story in place, fundamental is strong, industry firing on all cylinders and running on autopilot. All the optimism gets tucked away under carpet once the fall starts.

Four pillars of the economy; a benign political environment, cheaper funding cost, a good infrastructure & a sound management. A country where the financial hub (Bombay) undergoes deluge every year, Industry shuts for two days every week due to power cut and regulatory bodies lacking policy directions, inflation touching as high as 7% & even after 15 years of liberalization country FM decides cement pricing

Even if the growth is there, the question here is are we prepared for this. We have come to conclusion that the burgeoning population is an asset but what about the quality. The growth needs qualified manpower & skill sets. Budget showed huge revenue collections & boasts about meeting fiscal deficit target & FM brags about industry on autopilot but drivers seems missing

Time was ripe to invest in infrastructure & education heavily but we missed to popular tunes. Once the economy grows at double digit for couple of years, shortage of skill set would kill further growth

Inflation is a concern true and there could be three ways to curb: fiscal, monetary & supply side. Monetary policy seems to lack a long-term approach and continues with only operational tools targeting liquidity. Supply side sees a crazier approach when FM urging companies to cut prices and prohibits them from accessing market

And here comes the global bang, the country that still prepares for full convertibility gets serious bouts of global incidents. Hope the yen carry does not impact much and Central bank had preempted the situation. Moot point here is not the affect of global market or Stock market movements but are we prepared for the growth. Economy is bound to grow but is it sustainable? It needs a strong infrastructure, pro developmental policies & freer play for industry and most importantly a developed demography

Lets not wallow in the happiness of short-term growth and get sanctimonious about the same. Whatever goes up has to come down & only thing we can do is to control the fall or elongate the upward & downward move.

So leaders, industrialists, regulators & investors, its time to wake up before the gas runs out of the cylinders and the firing growth turns into smoke