20
Jun
08

India inflation rate rises to 11%…

 Indian inflation has risen to a new 13-year high. 

INFLATION CHART

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2008

4.84

5.23

6.02

7.95

8

8.24

11.05

2007

7.36

7.81

7.56

7.74

6.79

6.08

6.86

6.41

5.74

5.48

5.10

5.07

2006

5.00

4.80

5.00

4.97

5.84

6.47

5.71

6.14

7.02

7.17

6.70

6.94

FIG : INFLATION CHART

  • Wholesale price inflation rose by 11% in the 12 months to 7 June, up from the previous week’s 8.75%. The inflation rate is now at its highest since 1995.
  • Inflation is being driven higher by the rising cost of fuel and food, and is well above the government’s target of between 5% and 5.5%.
  • The jump took many analysts by surprise and further interest rate rises are now expected.
  • The BBC’s Delhi correspondent Sanjoy Majumder says the latest figures come at a bad time for the governing party, which is facing elections in a number of states this year.
  • Unlike most countries, India calculates inflation on the wholesale price of a basket of 435 commodities, which means actual prices paid by the consumer are much higher.
  • Cooking gas prices have risen by 20% and diesel is up 21%.
  • Although an election must be held by May 2009, our correspondent says there is some suggestion it may be held later this year.
  • With the central bank expected to increase interest rates to try to control inflation, India’s economic growth is expected to slow down and combined with rising prices, this   may translate into voter anger, our correspondent adds.

Rate rises

1. Last week, India’s central bank raised short-term borrowing rates from 7.75% to 8%.
2. The unexpected rate increase was the first since March 2007.
3. The Reserve Bank of India is keen to address spiralling inflation.
4. But there are concerns that interest rate rises will not do anything to curb rising energy prices, which saw India recently cut fuel subsidies.
5. This sparked protests in many parts of the country from consumers and transport operators.
6. India imports nearly 75% of its crude oil requirements but subsidises the cost of domestic fuel products.

What should the government do?

We need less government and more governance, particularly e-governance. Public expenditure has gone up from 10 billion rupees in 1950 to 3400 billion rupees in 2007. The Sixth Pay Commission submitted its report very recently. It has recommended a 40% increase in the salaries of 3.5 million federal government employees that will also benefit 45 million state-level employees, while conveniently ignoring 375 million people who work outside the government. While no one would begrudge government officials a fair salary, the related recommendations like downsizing and fixing accountability have been ignored time and again. It is therefore not surprising that one economist has called this “The Prey Commission.”

The Central Bank should stop artificially maintaining the rupee at a certain level. Let the rupee have a free float. It is likely to appreciate (by as much as 10%) in a few months. A stronger rupee would mean cheaper imports. Unfortunately, it would also mean fewer earnings for exports. The export lobby has enjoyed the benefits of a weak rupee long enough. Perhaps it is time for some payback. Let Indian business find other dimensions of competitiveness.

The most vulnerable sections of society who are mostly in the unorganized sectors need some form of protection. Public/private partnerships that do away with opportunistic intermediaries seem to be the only way to reach out to these sections of the population.

• There is an urgent and crying need to improve agricultural productivity and ensure a fair price to the farmer through disintermediation. Our agricultural productivity is just about 50% of China’s. The architect of the country’s green revolution, Dr M S Swaminathan, has made several pragmatic recommendations. Since he is no longer in a position of authority, he has few listeners.

• A significant factor in the spiraling of prices in sectors like real estate, and the hoarding of commodities for speculative gain, can be attributed to the parallel economy that is estimated to be at least as large as the economy itself. 60 years of platitudes have failed to produce any results. The time for drastic action is now. Demonetization could be one solution. How about a new Indian rupee with effect from January 1 2009? If the initial valuation is kept at 50 existing rupees to 1 new Indian rupee, we would start with a strong currency, while reducing the physical quantity in circulation by a factor of 50. Bank accounts would be automatically converted. A certain amount of cash could also be allowed to be converted. Any unaccounted money could be brought into the mainstream, as a one-time measure, by levying a suitable tax (say 50%). This requires political courage but has the potential to do wonders for the economy.

Finally, though not related to rising prices, the civil nuclear
cooperation deal between the India and the US is as good as dead. The government dare not risk the prospect of having to face an early election by pushing the deal through. Postponing it by a year automatically means having to deal with a new US administration that may not be as enthusiastic as the present one to see the deal becoming operational.

Sources : British Broadcasting corporation, Harvard business publishing Ltd,

 

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1 Response to “India inflation rate rises to 11%…”


  1. 1 kevin abraham
    June 23, 2008 at 6:55 am

    well i guess that inflation is not a phenominon isolated to india alone . the whole world is facing this crisis and please do not belive the e-mails being sent about pakistan having a petroleum rate of 17 rs . their inflation is in the 20 % ranges.

    China has increased its petroleum product rates by 18 % way more than india . i guess we will have to bite our teeth and get through this tough period i guess the whole world is going through . a similar trough was experienced in the 1970 ,, lets hope that the human spirit triumphas this time around too 🙂


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