Thursday, June 5, 2008

Reining Indian Inflation

A #1 English daily in India reads “ Govt adds fuel to ire” ; this is the reaction of yesterday`s Indian Govt. announcement of fuel price hike! Can any Govt. ever subsidize a product which has a ever increasing domestic consumption and 70% of the gross consumption is imported? Obviously the reply is no. So, like any other Govt. the Indian Govt. is left with no choice but to hike the price of fuel. The price of fuel in India is still controlled by Govt. In fact in the days of globalization, how long that can be continued is anyone`s guess. Here any unpopulist action taken by Govt., is encashed by the political parties, those who are not in power and aspiring for it. “The public opinion is humbug” –as the old adage goes. In the state of West Bengal (during colonialisation this state became the first to come in touch of West ironically!) called for a “bandh”, paralyzing the life for two days. As in twoconsecutive days, two different political parties call given call for “total strike”; what is popularly known as “bandh”. However, keeping in tandem with the appeal of the Prime Minister, the State`s finance minister has reduced the state sales tax for the fuel, cutting down the impact of increase , nearly by half. This is a good gesture, despite of colossal losses the state is going to suffer for the stike for consecutive two days, keep aside the untold sufferings of the daily wage earners and many others in urgency.

Indian economy is already reeling under the tremendous pressure of inflation, the inflation rate is touching the new high almost every day. It is around 9% now, highest in last 13 years. This new hike in fuel price is likely to push it further high. Whereas the bank interest rate is hovering around 8% ; this is all the way causing the erosion value of Indian currency. The most sufferers are Indian middle class whose savings are losing its worth in short, medium and long term. The share market has taken a fresh correction with the new of fresh hike, apprehending the rise in inflation rate and fall in demand resulting in all around recession. The are bound to take fresh look on the rate of interest, as the leader of the Indian banking industry has already announced hike of interest rate on its deposit. Though other smaller banks are reluctant to follow the suit, since they fear that this will hit their already shrunk margin. As the hike in deposit rates are bound to hike the lending rate as well. This will cost more for the industrial off take of funds from banking system, resulting further inflation. It appears to be a vicious cycle.

The answer may lie in the good monsoon and abundance in agricultural production to control the spiraling inflation; as some pundits say. But that too, will take no less the 4-5 months time. Till then, where is the relief? Finally; does that truly hold the answer!

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