Inflation: Catch Me If You Can!!

Inflation: Catch Me If You Can

India with over 270 days of sunshine, 900 mm of annual rainfall, varied agro-climatic conditions, hundreds of rivers kissing its soil and the huge agrarian population has all ingredients for it to be a farm power. Yet India faces the daunting task of taming Inflation.

The table shows the movement of local retail prices for the major agricultural commodities in 4 major cities of India.

Food Price Inflation

As we see, the prices of all the agricultural commodities have risen drastically in the past few months. Significant price increase has been observed in commodities like arhar dal, sugar, potatoes and onions.

The key reason cited for this food price inflation is the bad monsoon in India.

The high food price inflation is having a significant impact on the Indian consumer, the “AAM ADMI” as we know him.

As we see, approximately 42.8% of the average household spending goes into food products. With India facing high food inflation, the consumers have to cut their spending on other non food items and thus affecting the total GDP of the nation( as the consumption part goes down).

As our traditional Indian culture believes in investing their savings in gold and at the most in the fixed deposits which yield around 8-10%, inflation being around 12-14% is hurting this AAM AADMI. He is losing his purchasing power without even realizing.

A number of reasons other than erratic monsoon behaviour mentioned earlier can be given as:

1. India lost around INR 58,000 crore worth of agricultural food items due to lack of post agricultural harvesting infrastructure. If the government made efforts for the proper storage of these food items, the price rise would be well under control.

2. The Indian farmers are largely dependent on the monsoon season for the irrigation of the crops. The Government talks about inclusive growth and stress on rural India. However, it seems not to have helped the farmers in any-way as the suicide rate has been on the peak in the recent past.

3. Productivity issues are also prevalent in India. The per hectare agricultural yield in India is half that of China. This again points of inefficiency and the failure to help the farmers adopt latest technology in order to increase the crop output.

Indian Government has never seen to address these issues although it talks about inclusive growth and developing the country. There are a number of things into which the government can look into such as control on hoarders and black marketers, allowing the private sector to import and store these goods at low import duties and also release its large wheat storage into the market. Though these are not major factors, Government of India can adopt them to control the food inflation.

However, inflation in the economy like India has become a common phenomenon; hence natural fallout of this has been that we, as a nation, have become virtually intolerant to inflation.While inflation till the early nineties was primarily caused by domestic factors such as supply usually was unable to meet demand, today the situation has changed significantly. Today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone drastic changes.

Needless to emphasise, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalisation era like negative, or slightly positive, real short-term interest rates. The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone. There is only one way out for India a significant increase in real, or inflation-adjusted, policy interest rates.

Considering these factors, it is very important for the Government to try and control the inflation or at least try and ensure that these circumstances do not arise again in the future. As mentioned above, there are several ways of curbing food inflation. It is only that the Government needs to be more proactive rather than being reactive.

Inflation that stood at around 8% 12 months back is still hovering above 8% mark and central government which initially expected it to moderate by itself due to base effect finds itself in a soup. Inflation has not subsided primarily due to its incidence across different commodities. Pulses and potatoes were the drivers of Inflation a year back while onions, milk and dairy products have been the main culprits today. Erratic rains in three major onion producing states (Maharashtra, Karnataka and Gujarat) delayed the Kharif crop and led to the spike in Onion prices ( Rs.80kg ) which in turn led to rise in food inflation(18.32% from 14.4%). Food articles that have a weightage of 14.34% has led to the spurt in overall inflation ( 8.43%). Composition of the items driving the inflation has changed but Inflation continues to haunt the “AAM AADMI”.

Government has added to the woes by not dampening the prices through large foreign exchange reserves and by exhibiting a lackadaisical approach. It failed to realise that inflation was more of a generalised problem than supply-demand problem. Also certain policies of government that were introduced to appease certain sections of society have worked against the very purpose for which they were introduced. Hiking of minimum support prices for cereals (from 49% to 73%), pulses and oil seeds ( by up to 83%) have added to the problem of inflation.

Food articles which are the main drivers of the inflation numbers are prone to speculation and speculation can be responsible for pushing up the prices even if there are only minor demand- supply imbalances. Speculation is a real concern in deregulated and liberalised economy like that of India. The margins between wholesale and retail prices have increased in recent times stressing the role of speculation on food and commodity prices.

One of the most important food items that have had a strong impact on current inflation situation is onions. Onions at a price of Rs.80/kg is going to pinch the common man more than any other commodity as it forms the integral part of an Indian diet. Onions therefore are most significant politically and government has thus sprung into action with several measures.

a. NAFED, to sell onions at the retail outlets at Rs.35 /kg and government will compensate loss through budgetary support .However its reach is limited.

b. Government to ban food exports and liberalise imports to boost domestic supply. Ban can prove to be counterproductive as imports have become costlier

c. PDS to be strengthened through computerisation and other steps. However it will remain ineffective unless infrastructure for storage and transportation is overhauled

d. Government to take stringent action against hoarders and blackmarketers under Essential Commodities act. But this falls within the purview of the states and district magistrates, who lead the drive, rarely get a free hand

Source:Food Prices that hurt, Business India.

However they have hardly been effective in taming the rising prices. Thus dealing with inflation systematically is the order of the day.

Government needs to come up with structural reforms that can help it in reforming agricultural infrastructure and the distribution system. Farmers need to be included in the formal agribusiness networks. Private mandis offers a route for inclusion of farmers in this system. Private mandis are private players buying directly from farmers. But APMC Act restricts farmers only to the government regulated mandis and thus needs a change to bring this reform.

Besides this an efficient and seamless transportation is a must in order to stabilise the prices. This will ensure connectivity between food surplus region and food deficit region and also increase the fuel efficiencies of transporting vehicles and in turn stabilise the prices. Concerns of wastage should be dealt with effective Stock Rotation policy. Buffer stocks should be rotated regularly in order to stabilise the prices and storage systems should be effective in preventing the wastage. All these measures may not be able to give immediate results but will provide a solution to an issue that has to be dealt in a systematic manner. However If government continues with its current attitude, it will never be able to catch hold of the Inflation problem.

References:

· http://www.scribd.com/doc/37060882/Inflation-in-india-2010

· http://www.ft.com/cms/s/0/66b88094-1976-11e0-a853-00144feab49a.html#axzz1DB9ftAb6

· http://www.deccanherald.com/content/134882/need-tame-inflation.html

· http://seekingalpha.com/article/179191-food-inflation-in-india-causes-solutions

· http://resources.alibaba.com/topic/285558/Inflation_in_India_How_to_tackle_it.htm

• Business Line article- dated jan 25,2011
• Business India Jan24-Feb6 issue

-Snehal Punjani and Gunjan Sheth

"Life is a puzzle"

Second trimester is into the climax mode with exams all over my mind....But never ever did I think that I would be writing this blog with exams so near. But I have changed and so has the way I look at life. But this change makes me think of many things and look each issue from so many different angles. This “CHANGE”, pondering over it with my Economics book in hand, I realized the importance of the course I am pursuing.

I started my MBA entrance preparations with lots of expectations. Expectations of joining a residential program, excitement of being in a hostel with freedom written all around, enthusiasm of working on several activities, starting my venture someday or atleast hefty pay packages were some of the things kept me motivated as I was preparing for CAT. But little did I know then that I will land up at NM and my expectations will plummet like a person diving from a 150 storey tower.

As people keep saying 'Jiske Joh Naseeb mein hota hain wohi milta hai', I also pacified myself with same belief and entered my new home. My movie started rolling with the "Amazing"(from the TTK fame) inauguration and induction program .Induction program had ‘fun’ written all over it. Meeting new people, making new friends with lots of 'mental models'(hey see I am applying my HR learnings ), working in teams, working on assignments, boys trying to get the first mover advantage and many such things which were all packed into a two week program. Feeling of assignments and festivals made me part of the MBA culture. But this was just ‘The trailor,Picture toh abhi baki thi mere dost”

My first trimester at NM was full of surprises, a trimester full of highs and lows. I made friends with an amazing bunch of guys and girls. Hanging around with them redefined ‘FUN’ for me. I cherish every moment spent with them. The kind of changes they have brought about in my personality has been far more worthy than what I have learnt from my MBA so far. Keep them aside and I don’t find the trimester worth remembering. I had always felt that competition or competitiveness is an inert feeling. I was proved wrong. Each marketing lecture made me realise that this was not what I had joined an MBA for. On one front my communication’s classes taught me presentation skills and on other side I did exactly opposite by shouting and screaming for those 5 marks of class participation. But with time I have realised that as a future manager, I should first learn to take right decisions for such small petty issues and not fall into the trap of herd mentality. “It is not about what you do but how you do is what matters”

Second trimester was an eventful period where I really felt that I am actually part of an MBA program. First trimester was a mix of fun, social loafing, understanding group dynamics and little bit of studying. Result: Got the experience of being a 2 pointer. This was again that made me change look at things differently. I became more committed to my work. Gave more than 100% for each of my tasks and the kind of satisfaction I got at the completion of my tasks was truly amazing. I have to compliment my group as well. They gave me the environment that I always wanted to work in, an environment that fosters team spirit, far different from my previous experiences. Academic learnings from these projects have been tremendous for me personally and have realised that the real learning is outside the books. I was feeling great all through the trimester. Then suddenly my economics professor decided to be the preacher for a day. He gave a lecture on a value that everyone wants to espouse but not enact(Hey see again i applied my HR knowledge) i.e ’Honesty’. The lecture left a strong impression on my mind. Pondering over it that evening I realised that I was compromising on several things for benefits not worthy of such sacrifices. It made me feel so small. But man learns from his mistakes and so do I.

NM and in particular the second trimester has been a terrific experience for me It has transformed me tremendously and will always be indebted to my friends and the institution for this.

Just hoping that exams go well and all that started well ends well......

A quote that would sum up the entire blog" The road of my life twists and turns and no two directions are ever the same.Yet our lessons come from the journey and not the destination" -Don Williams,Jr,American Novelist and a poet.

"Yes We Can"

Remember this slogan "Yes We Can", "Change we believe in"....Who am I talking about??

Yes I am talking about the change we hoped would change world's fortunes...Mr Barack Obama.

Carrying the expectations of billions of people across this globe he has been arguably the most followed person on this planet.Into the second year of his presidential term, he arrives in India on Diwali day with hope of strengthening ties with the emerging power house...Our mighty India.

India might be buzzing with several important stories like Corruption,Poverty,Unemployment and list never ends but I have no doubts that all will be thrown under the carpet once Red carpet is rolled out for our beloved Mr.Obama.Mr.Obama will attend the Business and Entrepreneurship summit.He will then meet the captains of Indian Businesses in a meet which will see participation of more than 200 US companies and cream of Indian Industry interacting to strengthen economic ties between two nations.

The focus of the above agenda will be on role of India's consumption driven economy in increasing employment levels for US.This is very easy to understand.Obama,an astute leader that he is knows that ,Indian economy growing at 9% ,is a huge customer of US.With Indian economy blossoming ,US sees a role for India in reducing its unemployment levels which is hovering around 10%.He expects to use his visit to increase the Indian investment in US market.

Battery of Indian Politicians who will be seen running after the reigning Lord during this visit is going to be a Circus to watch.From our beloved Gandhi's to Mr.Chavan who has been busy allotting houses to his relatives these days,all will try to pamper Mr.Obama as if he is the last hope for India.India which calls for inclusive growth is not going to come by looking westward.India has to look inwards.Every Indian has to introspect....Introspection and timely corrective action is going to be the key to India's Growth.

CWG was termed as a huge success story where India showcased its growing strength.But we should not forget that what preceded games was something that brought shame to every Indian.We were able to salvage our faces just in Time and with God's grace everything went smoothly during the games.Corruption has been the word of the year.Scams after Scams keep cropping up but here every one knows give some time and everything goes under the carpet.

Mr.Obama is going to be the catalyst for the same.He will attract all the limelight and our frenzy media will forget about Aadarsh Scam ,CWG mess and IPL saga to allow our politicians to rest in peace.

One Hindi line that Obama will definitely take back from our political class is:

"Jaan Bachi Toh Lakho Paye"